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Key principles of investing for expats

10:28 16/11/2015
Whatever you do with your money, there are consequences. The main purpose of having money in the first place is to provide you and your loved-ones with a decent standard of living.

Anything that's left after that's been taken care of can be spent on projects like starting a company, buying a house or arranging a pension. If you're lucky enough to still have money left over once that level is taken care of, the rest can be invested based on your investor profile. That's the point at which you need to start caring about the tax implications of your investments.

This article will assume you're reached that level, and focus on the key principles of investing as a private investor.

Investment portfolio theory says your investments need to be diverse, to provide a higher return on your portfolio, as well as to give you a lower risk profile in the long term. In other words, you make more money, and stand less chance of losing money, if you invest in a variety of instruments – the old advice about not putting all of your eggs in one basket still holds good. One exception: an entrepreneur who believes in his or her business project might put everything he or she has into it, at least at the start. It remains a high-risk strategy, though, even in that situation.

It is important to know who you are as an investor before deciding how to allocate your money to different classes of assets. Banks or financial advisers will study your risk profile, in other words your appetite for risk, and your knowledge of investments. What do you know about the different financial products? What is your experience with them, and how would you react to a fall in the value of an asset? How long can you do without rapid access to your money? The shorter that time-span, the less risk you're advised to take.

Eventually you will be categorised as an investor either as Secure, Moderate, Balanced, Dynamic or Aggressive. Roughly speaking, that means your investment portfolio should include (respectively) mainly 0%, 25%, 50%, 75%, or 100% risk assets. The Secure investor could be someone with 100% of his or her assets in savings accounts -- the least risky sort of assets. The Aggressive investor, on the other hand, might invest 100% in the stock market, or even partly in derivative financial products.

Bear in mind: just because you're classed as an Aggressive investor doesn't mean the risk involved still isn't extremely high. It just means you're willing to live with the risk.

Property, or course, has its place in a diversified investment portfolio. However a direct investment in one real estate asset, an apartment for example, is not liquid and not diversified compared to a real estate investment fund, investing in many different property assets. Property bought as a residence should be a priority investment, but property bought purely as an investment asset ought to be balanced by other more diverse assets.

A good example of another long term investment for a 30-year-old is a pension plan, which would not be expected to pay out for another 30 years at least. The idea of the plan is that you're able to live off its earnings when it comes to maturity. This is an investment with a clear purpose.

Both your risk profile and your time horizon will change with time. An annual update of your investor profile is useful.

In conclusion, some key tips:

  1. Diversify your investments and invest according to your risk profile and time horizon.
  2. Steer clear of offers that seem too good to be true. Either you missed the catch in the small print of the dream deal, or someone is trying to steal your money.
  3. Borrowing to invest in risk assets – betting the house, sometimes literally – should be strongly discouraged.

Dave Deruytter
Head of Expats & Non-Residents at ING Belgium

Written by Sponsored by ING