It’s a good day indeed when the media asks smart questions and an even better day when you are quoted accurately, so I am circulating this article from an interview with Forbes contributor Robert Laura. The article gets into the nuts and bolts of investing from the perspectives of different nationalities. Below I take two examples, an American approach and a Singaporean approach to investing and provide some alternative options for returns while hedging for the unforeseen.
But First, Let's Be Honest..
Most long term investing strategies are rarely well thought out. Most people (including financial advisors) are influenced primarily by two things: the tax and savings incentives of your tax jurisdiction and how your money narrative has been influenced – usually by your parents or peers. This can lead to riches or problems such as being blindly committed to one asset class, one geographical location or one investment strategy while not fully understanding the risks.
Your average US investor has over 80% of their retirement savings in financial assets, partly because the US tax system incentivises Americans with deferred tax benefits in retirement accounts. That said, too many Americans (and too many financial advisors) have been sucked into a 60-40 stock-bond fund portfolio.
On the one hand the overall historical return for this type of portfolio is 6.2%. However if you factor in inflation, the real return is more like 4%. Take out even .5-1% for all fees (let’s assume this is tax deferred for the moment) and you are down to 3-3.5%. Not much return for a reasonable amount of risk. And serious alarm bells should ring when Princeton Professor Burt Malkiel, Godfather of the 60-40 portfolio, states this entire investment approach is “misunderstood and down right dangerous”.
So if a weak real return and a warning flare from the Godfather himself are not enough to make you think twice, here’s the bubble bath reader’s guide to what else could go wrong with having the bulk of your wealth stuck in this type of portfolio:
- Capital gains taxes go higher and higher in retirement when you start drawing down leaving you with less and less.
- Lower returns on stocks and bonds going forward – plan on it!
- Stocks and bonds go down simultaneously and persistently, it’s been relatively rare up until now.
- Among other things.
The real Achilles Heel of this portfolio though is insidious US dollar devaluation, which no one in the financial services industry wants to point out too closely. Why? Because then you’d start asking yourself, why am I taking on the risk of a 60-40 portfolio for a crappy 3.5% real return when I could just stick at least half my wealth into Singapore dollars or Swiss Francs and hedge out my inflation risk with foreign currency or foreign property.
Go back to 1985, the same place where most advisors begin to chart the returns of the 60-40 portfolio. Let’s say you placed half of your wealth into a Singapore dollar savings account far away from the grasp of Wall Street, which has historically paid more than 3% or more per annum up until 2009. Your real US$ return would have been at least 5% per annum for having a simple savings account incurring few or no fees at all. Put another way, you could have stuck US$100,000 into a Singapore bank and come out with nearly US$430,000 equivalent 30 years later with little real risk. Now you know why the real smart money was parking serious cash in offshore entities all these years.
Given that FATCA now all but ensures the “overseas savings account” strategy is impossible for any US passport or green card holder, your best option is to look into overseas property. You can write off your mortgage interest and a host of other expenses and amortize overseas investment property over 40 years, thus providing you nearly tax-free foreign currency income and a real asset hedge against the US dollar.
And for the record, I’d posit further that FATCA legislation has little to do with the US Treasury collecting handfuls of dimes here and there. Look at all the US corporate money legally parked overseas avoiding taxes by the billions – more than the total of all green card holders squirrelling away acorns under foreign banking mattresses (now free ports) or even better the foreign shell company system where some members of Congress park their own money. Nope, my guess is that FATCA, championed by Wall Street-friendly New York Senator Schumer, was partly enacted to further enrich Wall Street’s money-centered banks and keep the US voter at their mercy as we lurch from one financial crisis to another. If Treasury really wants income, fix the ongoing $21 billion annual problem of tax return fraud happening on their home turf.
Diversify out of property! Enough said. Talk about being overly concentrated in one asset class, property-crazed Singapore is one of the most home owning countries on earth (90%). This is partly thanks to CPF linked incentives towards home ownership and partly because, up until fairly recently, there have not been a lot of good or easy options to access financial market assets. This over-concentration has created an asset rich, cash poor type of dynamic in Asia’s garden city. What Americans have too much of, Singaporeans could stand to have more of, namely liquid assets invested in income paying stocks and bonds.
While the bond market is painfully small and restrictive in Singapore, Singaporeans with excess cash to invest could benefit by allocating a bit more of their long term investing dollars to dividend paying stocks, funds and ETFs.
Capital gains, dividends and income are not taxed in Singapore making this even more attractive than rental property and lower maintenance if you are not prone to panicking. The good news is that MAS seems to agree with this prescription because it is getting easier and easier to purchase government securities, individual stock positions and now ETFs, which use to be restricted to those with S$2MM net worth or more.
June: The Perils of Attempting to Get Rich Quick