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If you've
retired overseas, or you’re accumulating cash whilst working
overseas, then you’re bound to want to make your money work
as hard for you as possible. You’ll also want to know its
safe and not going to disappear into financial black hole.
There are
three main reasons you might want to invest your money –
getting your money to grow, getting an income from your
money, or perhaps a combination of the two.
So what are
your options, and where do you invest it?
Bank
Deposit Accounts
A bank
deposit account is a great place to put money you need
access to, or may need access to. In fact before you even
think about putting your money anywhere else you should have
some money tucked aside for a “rainy day”.
But the
return on a deposit account is unlikely to be spectacular.
Somewhere around 5% p.a. would be typical. If tax is payable
then the net return is lower e.g. 20% tax on 5% gives a net
interest of 4% p.a.
So in the
example above you might think 4% is a good return. But what
you need to consider is the real rate of interest, the
return after taking into account inflation. If inflation is
3%, and you’re receiving 4% net interest, then in real
buying power your money is only increasing by 1% per year.
Continuing
with the example above an investment of £100,000, with the
interest re-invested, would be worth in terms of buying
power just £101,000 after one year!
Again using
the example above if you invest £100,000 and take the
interest to supplement your income, then after one year the
real buying power of your £100,000 is only £97,000.
If you’re
retired and taking the interest each year from a deposit
account, then it won’t take many years before you begin to
feel the pinch, as inflation starts reducing what you can
buy with the interest!
So what
are the alternatives?
Collective Investments
A
collective investment, most commonly an investment bond or a
unit trust (mutual fund), are pooled investments. They will
typically pool together thousands of people’s money and
invest them in one or more different funds.
In turn
these funds could invest in property, shares (equities),
cash, or bonds, or even funds that guarantee your money
back. Depending on what you want, these could be very
low risk or even guaranteed investments, to very high risk.
It is down to you!
Key Points
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There are hundreds of different funds to
choose from
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There are a wide range of different fund
managers to choose from
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There are four main different types of
asset
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Even within the different asset types,
the level of risk/return can vary
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Some fund managers are better than
others
- The
difference between best and worst fund can be staggering
- There
are even funds which guarantee your money back
The reality
is that there are a number of different types of assets -
equities (shares), fixed interest, cash and property. You
can select some funds that combine all of these elements or
ones that contain just one asset type.
All funds
will belong to a particular sector, and the name of the
sector will generally give some sort of indication of what
type asset the fund is invested in. Below are some examples.
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UK All Companies |
Global Emerging Markets |
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UK Smaller Companies |
UK Equity Income |
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UK Gilt |
Balanced Managed |
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Japan |
Cautious Managed |
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Far East (ex Japan) |
Money Market (Cash) |
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The main types of assets
for collective investments
Equities (shares)
Most people view shares as being high risk.
It is true they can fall and rise in value. The level of
risk depends on two factors, the timescales you are
investing for, and the type of shares selected.
If you are investing for 10 years, then the
risk is lower than for investing for 1 year. If you have a
fund that invests in large UK companies then the risk is
lower than investing in new companies in China, or India or
new technology companies. But the new companies in Emerging
Markets such as China generally have a greater potential for
growth than long established large UK based companies.
Government Issued Bonds
Government Issued Bonds (e.g. Gilts in the
UK or Treasury Securities in the US) are in effect a
government’s way of borrowing. The government issues loan
stock, at a face value of £1, and will pay the holder
interest each year, until a fixed point in the future, or
indefinitely. This loan stock is traded on the market, and
can sell for a price higher or lower than £1. Most
government bonds have a redemption date at some point in the
future, at which point the government will pay £1 for each
one held.
The traded price of such a bond depends on
a large degree on interest rates. If a bond pays an
interest rate of 10%, and interest available elsewhere is
5%, then depending on the term until redemption, the market
price could be £2. Much would depend on what the view of
future interest rates was, and how long until redemption.
These are seen as one the safest type of
fixed interest investment since they are backed by a
government, although bonds issued by developing countries
are not as safe as bonds issued by the UK or US governments.
Corporate Bonds
These work in much the same way as
government bonds. The difference is that companies issue the
loan, and not the government. The rate of interest payable
is therefore usually higher, because there a higher risk
that the company could default on payment.
Whether or not a company is likely to
default depends on the financial strength of the company.
Corporate bonds are therefore given ratings, which indicate
the financial strength of the company concerned. There are
two categories of corporate bond, “investment grade” – the
lower risk and “sub- investment grade” which used to be
called junk bonds, and would carry a higher level of risk,
but higher return.
Property
There are two types of property fund. Ones
that actually buy property and rent it out – a “bricks and
mortar” fund, or a property trust fund, which would buy
shares in companies whose business is buying, renting and
selling property.
All “bricks and mortar” property funds have
historically invested in commercial property, although they
do also invest in residential property. They would gain from
the rental income and the increase in the property price.
Many retail parks and office blocks are for
example owned by investment companies, who rent out the
premises.
Investing in property is not risk free, and
commercial property also depends to a degree on how the
economy performs. If companies go out of business, then
demand for commercial property could fall.
The advantages of investing in a property
fund are that there is no personal involvement by the
investor, and your money is effectively spread across a
number of properties.
Cash
Funds
A cash
fund, sometimes referred to as a deposit fund or money
markets fund invests in bank and building society accounts
and what is deemed to be cash or “near cash” investments.
These are very low risk investments and you will get a
comparable return as investing directly in a bank account.
However, these funds do not fall under the European Savings
Tax Directive when wrapped within an investment bond.
Guaranteed Investments and Protected Funds
If you’re
looking for your money to provide you with a better return
than just a bank account, but don’t want any risk, then you
might want to consider a guaranteed investment or guaranteed
fund.
There are a
number of different types of these investments available for
expats in the offshore environment, and they can work in
different ways. The underlying aim of all of them is to
offer potentially better returns than a bank account, but
offer the guarantee that you will get your money back.
The return
may be linked to a stock market index, or a number of
indices – like the FTSE 100 or Dow Jones, or possibly even
a property indices. The guarantee could state that after
five years you would get at least your money back or a
return linked to one of the indices.
Some funds
are known as protected funds, and typically do not guarantee
your initial investment in full immediately. It may for
example guarantee 80% of the highest value of your
investment. So if you invest £10,000 then the immediate
guarantee is £8,000. If the fund grew to £15,000 then
regardless of future performance you would be guaranteed
£12,000. These types of funds normally offer greater
flexibility.
If you want to know more
about getting your money to work harder for you, then
contact an independent financial advisers for expatriates,
free and without obligation on +357 99 159 857 or
contact
us online.
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