5 Crucial Steps to Start Investing for Expats
The following is for informational purposes and should not be construed as specific advice or a solicitation to buy or sell any security. For advice on your specific situation, reach out to a financial professional.
For all of us, at some point in our lives the thought dawns us that we need to start investing. Some get started in our teens or twenties, perhaps because a parent or a friend introduced us to the idea. For others, the grind of daily life keeps us occupied a bit longer, until one day we wake up and realize we need to get started. This can be especially true for expats, because the ins-and-outs of living abroad often require so much attention of their own. But regardless of how or when we make the realization that we need to get started, that thought is immediately followed with the question, "But how?"
The truth is that investing can seem daunting. There are countless blogs and media outlets and gurus advocating one strategy or another. How do we know where to start? In this post, we'll be outlining a few simple steps you can take to begin investing, and we'll pay special attention to what that looks like for Expats, because there are a few considerations there that are specific to your particular location.
Step 1: Decide whether to do it yourself.
We'll end up revisiting this at the end of the post, but one of the first questions to ask yourself is whether you're a DIY'er when it comes to investments. Doing it yourself here is going to require one thing more than anything else: TIME. And not just upfront time. Time daily or weekly updating yourself on how your investments are performing and whether a shift is needed. It's a task that you can never truly check off your to-do list because the investment landscape is constantly changing, so your investments will need to be constantly refreshed. If you end up really enjoying it, that's great! But if it's more of a chore, you might consider hiring a professional.
If you can already tell that doing it yourself isn't really the right strategy, then you can shift your attention to finding the right advisor. If you're not sure what to look for, I've got a post specifically on what to look for in a financial advisor for US expats. You might also consider reading my post on signs your advisor doesn't really know investments. But for those of you who are at least considering doing it yourself, read on for more tips!
Step 2: Pick What Kind of Investment Account to Open
This step is really more of a financial planning question than an investing one, because it's more about your goals and financial situation than it is about what specific investments you're going to make. As with so many things in the financial world, the options are just about endless, but there are three basic kinds of accounts that could be worth exploring for many investors: A Traditional IRA, a Roth IRA, and a taxable brokerage account.
Traditional and Roth IRA's are both types of retirement accounts. They have very specific rules about who can invest, how much can be contributed, and how they're taxed. It's a big enough topic to warrant its own post, so I'll just touch the basics here and come back to fill in the details in another post.
In a Traditional IRA, you get a tax break in the year you contribute to the account, and the growth of your money won't be taxed from year-to-year. This can make it an excellent growth vehicle for long-term funds you plan to use in retirement. However, you'll pay income taxes on those funds when you withdraw them in retirement.
In a Roth IRA, by contrast, you won't get a tax break this year, but you won't pay taxes on either the growth or the withdrawals from the account when you retire. The contribution limit for both types of accounts is $6,500 for 2023 ($7,500 for age 50+).
So which type of retirement account is better? Both! The best case scenario for a retiree is to have healthy balances in both types of accounts, because this lets you be in control of your own tax bracket in retirement. Again, I'll leave the details for another post, since what we're mainly discussing here is just the basics of getting started. For further reading, check out my post on retirement planning for expats.
One specific consideration for Expats thinking about investing in an IRA: you have to have taxable income to be able to make contributions. That means that if you're planning on excluding all of your income from taxation using the Foreign Earned Income Exclusion, you may not have this option available. If you need help making decisions about that, it really probably is time to talk to an accountant or a financial advisor.
If you aren't planning on using the funds for retirement, or you plan to invest more than you're allowed to contribute to an IRA in a single year, another easy option would be a taxable brokerage account. You'll have to pay taxes on capital gains and dividends in the account as your money grows, but there are no penalties for taking money out before you retire (there can be penalties for early withdrawals in IRA's of either type).
*Note: There are a great number of different types of investment accounts, all with specific purposes. I've chosen to highlight three of the most common types that I use with many of my clients, but there may be a different type of account that is more appropriate to your unique circumstances.
Step 3: Choosing an Investment Strategy
Once you've decided what type of account to start investing in, it's time to decide how to invest the funds. That means picking what stocks, bonds, or funds to purchase! If there's one bit of encouragement I can give to someone who's interested in doing this for themselves, it's this: Do Your Homework! So often I've seen individual investors fail because they haven't done the hard work to really understand what they're invested in. They saw some nice historical returns for a certain mutual fund, for example, so they purchased without ever understanding what kind of a risk they were taking. Don't let that be you! Just because an investment has worked out okay in the past doesn't mean it's the right choice for the future, and there's a lot more to think about than what's had the highest return in the last couple of years.
Learning how to make investments starts with developing an investment philosophy, and there's more than just one way to think about investing. The three basic schools of thought are as follows: Passive, Fundamental, and Quantitative (or Technical) investing. I use a combination of all three with my own investment clients, because there are merits to all three approaches.
Passive investing is founded on the belief that it's very difficult to produce outsized risk-adjusted returns on a consistent basis, and so the best strategy is simply to reduce cost. Passive investments don't seek to outperform any index - instead, they look to match the performance of that index as closely as possible for the lowest expense. For those of you who want to do it yourself but aren't sure about the amount of time involved, this can be a convenient approach. Since you aren't trying to outperform, you don't have to be on top of every single market movement the way other strategies need you to be.
*Note: an "index" is simply a group of stocks, bonds, or other investments that are intended to represent some portion of the investment market. For example, the S&P 500 is an index that helps investors see how large, US-based companies are performing.
Fundamental Investing seeks to determine the "fair price" of an investment. The "fair price" of a share of stock, for example, might be based on that company's growth prospects, or current income, or free cash flow, or any number of other factors. If the actual price is cheaper than the "fair price," a fundamental investor buys that investment. If the actual price is higher, a fundamental investor stays away, or perhaps sells if they already own the investment.
Quantitative Investors, in contrast, don't care what the "fair" value of an investment is. "Quants," as they're called, simply care how the price has been moving, regardless of the reasons why. If the price movements make it seem that a further rise is likely, they buy, and if it seems the price will fall, they sell. They don't make any attempt to determine whether it was ever over- or undervalued.
There are countless variations to all three investing approaches, and since this post is simply a get-started post, I'll leave the details to further research. Personally, I use quantitative factors overlaid on what's called a "top-down" fundamental approach, blended with some elements of passive investing for my clients.
Step 4: Decide How Much Risk to Take
Not every good investment is the right investment for you. This point cannot be overstated! Your specific goals and risk tolerance determine how aggressive you should be in investing, and no two humans are exactly alike in those respects. If you have a financial goal that is ten or more years off, you can likely afford to take greater risks, because you have more time to recover if you lose money in your investments. In contrast, if you'll need the money within three years, your investments should be much more conservative, because it's much harder to bounce back from a loss in such a short time window.
Even for those with longer time horizons for their investments, an individual's risk tolerance plays a huge role in how risky they can be. It's so important to have a good feel for how much risk you're willing to take. To illustrate the point, one of the most common sayings in investing is "buy low; sell high." That is, you want to purchase a stock when it's price is low, and sell it when its price is high. If you overestimate your ability to stomach a loss, however, and the price of one of your stocks falls, you'll be tempted to sell your shares at the bottom, in effect reversing the saying: "Buy high; sell low." Not always, but in general, stocks are more risky than bonds, but have a higher potential for growth. Likewise, stocks of startups or distressed companies are more risky than established companies with predictable cashflows.
Step 5: Expat-Specific Considerations
For those of us who live outside the US, there are a few more considerations beyond the typical situation.
Custodian - to invest, you'll have to open an investment account somewhere, and not all custodians work with people living in every country. You'll need to find a custodian that works with people where you live.
Foreign investments - The US tax code is particularly unkind to mutual funds domiciled outside the US. For this reason, it's typically best to invest with a US-based investment company, even if you live abroad.
Time zone - If you're considering a more active investment strategy, such as fundamental or quantitative investing, you'll need to be aware that trading hours for financial markets in the US are 9:30am-4:00pm Eastern Time, and your ability to trade may be limited outside those hours.
Information access - We live in the Digital Age, but nonetheless it can be difficult to access investment research in certain locations. If you're looking to take on a more active strategy, this could be a limiter.
If you've made it this far in the post, you're probably thinking one of two things. Either you're really excited about the prospect of doing all the research and analysis to do investing yourself, or you're feeling overwhelmed at the amount of work required to do this well. If you're a born-and-bred analytical researcher-type, congratulations! This could be a fun and rewarding exercise. But for the rest who don't instantly start salivating at the thought of filtering through mountains of data in an ever-changing decision landscape, I'd encourage you to reach out to us here at Polaris Asset Management. Investing is what we do, and we'd love to walk you through a streamlined process to get started investing with us. Click below to get started!