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In the US, expats should be concerned with beating inflation and taxes to preserve the value of their savings. In practice, you cannot avoid purchasing power erosion unless you invest in risky assets.
Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in the US. If you plan to return to your home country, you might prefer beating the inflation rate of that country.
Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside the US but you invest in any USD assets, you are effectively making a currency bet.
Inflation in the US
Over the past century, US inflation has averaged around 3%. However, inflation has been closer to 2% since the 2008 downturn.
For more information on monetary policy, see Foreign Exchange for Expats in the US.
Risk-free investments generally include savings accounts and Government debt. US deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Easy-access savings accounts generally have a very low yield (around 0.1%). Term deposits are more likely to attract a higher yield, but the rates may vary strongly from one bank to another (from 0.1 to 1%). This is still well below inflation. In other words, the real value of your savings is doomed to erode if you rely solely on US savings accounts.
You are also unlikely to preserve your purchasing power if you invest in US Government debt unless the market demands even lower interest rates in the future (you would then make a capital gain if you resell your US Government bond).
Excluding taxes and capital gains, US Treasury bonds fail to beat inflation unless their maturity exceeds seven years (September 2013 figures). This means that you need to tie up your savings for at least seven years if you want Government debt interest to compensate you for inflation. In summer 2012, this was 20 years.
The US has a long track record of forcing savers to accept negative real interest rates during tough economic times. For instance, negative real interest rates have been used by the US Treasury to pay down the War debt until the early 1970s.
US securities (costs)
Do consider carefully the applicable transaction costs if you wish to trade US securities. Here are the main costs you should be aware of:
Online share dealing is generally cheaper than its phone-based counterpart. For an overview of the US stockbroker market, click here.
US securities (overview)
The US stock market has three main indices: the Dow 30 or DJIA, the S&P 500, and the Nasdaq 100. At the moment, US shares are at record high levels as the DJIA has more than doubled since its March 2009 bottom. Therefore, the dividend yields currently offered by the market are quite low, and it has become fairly tricky to find companies paying steady dividends for a yield above 4%.
Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, US interest rates are at record low, but they might rise if the Fed tightens monetary policy. See Foreign Exchange for Expats in the US.
You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.
On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.
From a financial point of view, the real return on investment consists of:
When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher potential for capital gains over the long run.
Technically speaking, it is true that low dividend yields may be supplemented by capital gains. This is what happened for those who invested in early 2013 despite the already low yields at the time. However, it is important to bear in mind that the Dow is now close to its all-time inflation-adjusted peak (reached in 2000).
Fixed income securities have tended to underperform over the recent months. In May 2013, the markets asked for a 1.6% yield on 10-year US Government bonds. In September 2013, this has increased to around 2.8%. QE expectations are largely behind the move, but a rise from 1.6% to 2.8% is already tremendous. Any market correction would offer large capital gains opportunities.
The same thing may apply for corporate bonds, but these are higher risk. Hence, the market tends to ask for higher interest rates on corporate bonds because the company may default on its debt.
As an expatriate, you don’t necessarily want to be a speculator. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet. A lot of money can be made on currency bets, but a lot of money can be lost as well.
Charles is an Irish citizen who has been posted to Miami for one year. He will return to Ireland later on.
His net salary is $100,000 per year, but he intends to spend only $50,000 per year. He thinks it would be appropriate to save an additional $15,000 for a rainy day whilst he is in the US.
Charles is effectively making a currency bet if he fails to convert 100,000 – 50,000 – 15,000 = $35,000 into euros.
Alternatively, FX exposure can be reduced (or increased) through the purchase of relevant derivative products (e.g. FX options, swaps or forward contracts). Derivatives can be highly effective but they are quite complex, especially for individuals with little financial education. It is advisable to seek professional advice before taking action.
Overseas investments generally
If you wish to invest in overseas assets, there are a few points you need to check:
Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.
For more information on offshore investments, see our section on alternative investments.
The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in the US.
Your worldwide investment income is taxable in the US if you are resident in the US for tax purposes, or if you are a US citizen. If you have non-resident alien status, you are liable to tax on your US-source income only.
For more information on investment taxation, see TAXATION – Investment Taxation for Expats in the US.
Sections in FINANCIAL CONSIDERATIONS IN THE UNITED STATES OF AMERICA:
» Money Transfers for Expats in the United States Of America
» Foreign Exchange for Expats in the United States Of America
» Banking for Expats in the United States Of America
» Pensions for Expats in the United States Of America
» Investment for Expats in the United States Of America
» Wealth Management for Expats in the United States Of America
» Property Investment for Expats in the United States Of America
» Insurance for Expats in the United States Of America
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