The National has a Money Clinic every three weeks or so for readers’ questions.
This week was pretty much my dream question, allowing for a complete overview of investing by yourself, from mindset to transaction fees.
The newspaper kindly gave me 650 words instead of the usual 350. Still, I packed it in pretty tightly and felt I could write a whole blog about every sentence. If you find it a bit dense, I am planning to unpack and expand on it in future blogs, so there will be more time to clarify each point.
Let me know what resonates for you or what you are still concerned about in the comments section below.
Rather than use a financial advisor, I’d like to invest directly into funds. What’s the best way to go about this and what pitfalls should I watch out for? GH, Dubai
Financial advisors provide knowledge. Savings plans provide discipline. If you go it alone, you’re going to have to find some of both.
First, work on your mindset – this will protect you against many pitfalls. Be prepared to spend at least a couple of hours learning investment basics. Become extremely conscious of cost and suspicious of complexity.
Commit to investing monthly or quarterly, even when the market is tumbling. You should be delighted when the market falls, as the stocks you will be holding for ten or more years are going on sale.
Spend ten minutes per month to invest your money and then get on with your life. You have better things to do than checking your portfolio.
The best book to get you started is “The Millionaire Expat” by Andrew Hallam. Websites like Monevator and This is Money have good advice, though less focus on expats.
How much do you want to spend annually when you retire? Divide the sum by 3 or 4% to find the portfolio size you will need on retirement. The Moneychimp.com compound interest calculator can then determine how much you should be saving annually to get there.
Are you saving for anything specific in the next 1-10 years? You can create a lower-risk sub-portfolio for it.
This is the single biggest driver of investment outcome, so it’s worth getting right. Make sure you always have at least 3 months of expenses in a cash account.
Your main portfolio should be for retirement and contain a mix of bond and equity funds. Equity funds provide a higher return but are also more risky.
Assess your risk appetite – how much money are you prepared to lose in a bad investing year in return for higher gains in other years? Risk is also linked to your time horizon. If you have 20+ years to retirement, you can (and should) ride out the ups and downs of the equity markets.
A conservative guide is to have your age in bonds, i.e. a 40 year-old should have 40% bonds, 60% equities. [This is far too conservative for me by the way – 20% should be fine for anyone with more than 10 years of saving left to go.]
Sub-portfolios for specific needs, e.g. a house deposit in 3 years, require a more conservative allocation such as 70% bonds. Manage sub-portfolio allocations on a spreadsheet – you only need one actual investment account.
Regional diversification is important. Most of your portfolio should be in developed markets such as the US, UK and Europe. Avoid niche investments in whatever did well last year.
Platforms like TD Direct Investing (Luxembourg), Saxo Trader GO (Dubai) and Interactive Brokers (US) [who I use] allow expats to invest in funds and ETFs (Exchange Traded Funds). Note any platform fees and transaction fees, especially whether they are percentage-based or a flat rate.
The platforms will encourage frequent trading, exotic funds, leverage and options, as that’s how they make their money. Stay ruthlessly focused.
Prioritise passive index tracker funds over active funds – after costs, their performance is superior in good times and bad. Emerging markets might be an exception. Avoid any fund with large upfront fees or management fees of more than 1%.
Vanguard and iShares offer very cheap ETFs with wide regional diversification. You won’t need more than 2-5 funds. A UK expat investing in GBP for example:
- 50% Global stocks – Vanguard FTSE All-World ETF (VWRL, 0.25%)
- 20% UK stocks – Vanguard FTSE 100 UCITS ETF (VUKE, 0.09%)
- 30% UK government bonds – iShares UK Gilts 0-5yr UCITS ETF (IGLS, 0.2%)
For those investing in USD, it’s hard to beat VWRD, which is the USD equivalent of VWRL above. Avoid US-domiciled products, which could expose your heirs to estate tax.
Invest regularly but in large enough amounts that transaction and currency fees aren’t more than 1%. Consider investing in USD-denominated funds if you’re paid in dirhams. Find a good currency broker to change currencies, as your platform might charge you a bigger spread.
Rebalance your portfolio to maintain its asset allocation by adjusting how much of each fund you purchase. Do not try to time your purchases to what the market is doing.
And finally, teach others – they’ll thank you with a spectacular dinner in 30 years’ time.
Have a look at the original article in The National here.