As an expat in a foreign country, making investments should be the last thing on your mind. After all, who knows how long you’ll be here and what do you know about the foreign market anyway? Make no mistake; you should only consider investing if you have extra funds lying around, because as much as successful investments can double your wealth, they also come with huge risks. However, if you are interested in playing the investment game, then this guide will prove to be helpful to you in building your investment portfolio as it explains the different types of asset classes.
Putting together a good, if not great, investment portfolio is always a challenge, given that the global economic landscape is filled with uncertainty. Fortunately, our Finance Expert, IP Global’s Director Darren Mellis, is here to explain what you can invest in and why real estate investing is safer.
First, let’s start by looking at cash-based investments (Certificates of deposit (CD) and money market funds)…
Just a year or so ago, the Bank of England (and the Fed across the pond) announced that the public should get ready for a gradual return to “normal” interest rates. However, at present, we appear to be heading in the opposite direction, with rates dropping to as low as negative numbers in the eurozone and possibly in the UK soon.
The objective for investors is simple: Ensure there is a steady capital growth and income stream for any investment. There was a time when cash-based investments were safe, but not anymore – the odds of rates climbing back up to the Bank of England’s “normal” range of around three to four percent in the medium term appear extremely slim. As a result, even with the “high interest” rates from banks, your returns are always going to be disappointing, especially if the rates set by private institutions are linked to national central bank rates.
The value of cash investments lies in their security, as your money is not tied up while waiting for your investment to come to term, which means they can support your investment portfolio. However, if you want to see capital growth and generate a steady income stream, you need to look at capital markets.
So, what are capital markets?
Capital markets are defined as markets for buying and selling equity (stocks) and debt (bonds) securities. As such, capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Unlike cash-based investments, which are short-term obligations (less than 90 days) capital markets involve the issuing of stocks and bonds for medium-term and long-term durations, generally with terms of one year or more.
Shares, commodities or bonds?
Shares involve either investing directly in your own handpicked selection of companies or placing the investing decision-making in the hands of experts through a fund or investment trust. Shares are considered medium or long-term investments because their performance tends to fluctuate within any given period of time, but if you can hang on to them long enough, their capital growth outperforms cash investments by far. There’s also the added incentive of a revenue stream through annual payments to shareholders, such as dividends.
But if it’s predictability you’re looking for, shares can – and frequently do – fall short of expectations. Let’s say you’ve invested in a fund that consists of a range of shares from one of the big indexes such as the FTSE 100 or S&P 500. You are expecting a ballpark amount in dividend payments this year, only to find that a number of the big names that the fund is exposed to (Rio Tinto, Shell and HSBC for instance) have had to slash their payments this year. Beware of over-reliance on share-based investments if a predictable revenue stream is a priority.
Meanwhile, the commodity market is divided in soft and hard: Soft commodities consist of agricultural products such as wheat, coffee, cocoa and sugar; hard commodities are mined, such as precious metals (gold and silver) and oil. However, for a new and inexperienced investor, investing in the commodities market is rarely your first port of call.
A commodity futures contract (futures) is an agreement to buy or sell a fixed amount of a commodity at a predetermined price and date. By doing so, buyers can avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products before the prices fluctuate. But the commodities markets can be equally volatile and unpredictable as shares, meaning that futures can either lead to high gains or losses.
Investing in precious metals, such as gold, is a good defensive strategy/backup plan for your portfolio. The capital value of gold tends to increase or stay steady over the long term, and its performance is shielded from what is happening elsewhere on the markets. In short, you can use it as a hedging tool to preserve a portion of your capital.
Bonds are often described as ‘IOUs’ issued by governments (referred to as ‘gilts’) or by large companies (corporate bonds). This method of investing makes you a creditor of the party who issued the bond. Bonds offer you capital security – unless the company in question goes bankrupt. They also offer you predictability, especially if you opt for bonds that offer a fixed annual return. However, like cash-based investments, a fixed income stream and lower level of risk also means a lower level of return compared to shares investments.
What makes property investments a better option than the above?
Let’s take a hypothetical scenario: Another round of disappointing GDP figures from China causes a number of industrial shares in your investment fund to decrease in value and companies to cut their dividend forecast. Meanwhile, you also discover the tech stocks that you intended to sell this year due to their strong performance last year have also decreased in value as a result of weak revenue gains. In this situation, your whole investment portfolio is taking a hit.
Property investments on the other hand, are ‘above the fray’, so to speak. Their performance is very loosely related to what is happening on the stock markets, as you will stand to collect revenue from your tenants, regardless. With the right property choices, you have the potential to diversify your portfolio, reduce your risk profile and increase your gains.
In fact, the fundamentals that influence capital growth in property are supply and demand, which are usually separate from what’s happening in the market. Properties located in major cities and near key tourist attractions such as London, Manchester, Melbourne, Brisbane, and Hong Kong, may see higher demand compared to properties located in rural areas.
That being said, profit is not guaranteed. Each potential investment must be individually assessed based on its merits, which is what my team and I at IP Global carry out with due diligence. We go through a rigorous process of evaluating the best property investments for each of our clients and how local current and upcoming developments in selected locations will affect its prices and ultimately, our clients’ profit margin. Our targeted approach also means that our research and results frequently see capital appreciation that outperforms local price increases.
You can find out more about building your property portfolio to help strengthen your investments by downloading our Investor Guides.