Investing Lump Sums Investing Lump Sums
Investing Lump Sums

 

As a high-earning expatriate there will be several critical occasions during your life when you should think about investing a lump sum. And if you are a first-time investor this can be a daunting experience.

Why is equity investment better than cash?

Even the cleverest investor can struggle over this. The result? Far too much money is squirreled away in no interest bank accounts and low interest current accounts.

Many people think their cash deposits are risk free. But over the last twenty years inflation has slashed the buying power of cash deposits leaving these investors with much less in real terms than they started out with.

 
All investors have to face these home truths
 
Home Truth Number One

Since the sixties inflation has seriously reduced the buying power of cash deposits in all major currencies 

Home Truth Number Two

In todays international market place keeping your money in cash means you are betting on the continuing strength of that

Home Truth Number Three

Equity-based investments normally beat cash over long term 
(five or more years)

 
Home Truth Number One

Expats with cash deposits are facing a much riskier investment than many may realise. Most of us live and work in the same country all our lives. You however, because of your global outlook and offshore location will have to take into account what is happening to several currencies.

For example: the currency you earn: your home country's currency: and the currency where you plan to retire. This brings in the daunting factor of currency risk.

 
Home Truth Number Two

If you keep your money in cash you are betting on the continuing strength of that currency.

Eleven European countries have recently attempted to rid themselves of currency risk by introducing a common currency. Currency risk is viewed so seriously by these governments they are prepared to surrender their national interest rate policy to the newly formed European Central Bank. More countries are expected to follow. 

Consider the devastating currency losses of expats currently living in Argentina who kept their money in the peso. It has fallen by 70 per cent in the last year and the government has frozen bank deposits too. Perhaps its time you acted too. Currency risk can be greatly reduced by investing in equities of large multinationals. You automatically benefit because their profits are not tied to one currency but are spread globally in many.

And equities have consistently out-performed cash in the long term.

Other problems remain however. In today's shifting markets how can you be sure that it is the right time to invest? And how do you know that you won't lose a substantial proportion of your money overnight?

The stock market has an enviable track record of performing well through crisis after crisis. 

Here are some you will recall:

1973 The OPEC 70% oil price hike
The Third World debt crisis in the early eighties

1986 Chernobyl
Black Monday, the Stock Market crash of October 1987

1991 The Gulf War
UK exits the exchange rate mechanism (ERM) in 1992

1995 Rogue trader
Nick Leeson ruins the 200-year-old Barings Bank Turmoil and currency collapses in the Far East, Russia and Brazil

2001 September 11 New York

The market recovered on every occasion and recently only took six months to rise above the pre-September 11th levels.

 
Home Truth Number Three

Equity-based investments have on average consistently out-performed cash over the long term (five years or longer)

The first strategy is to buy your equities over a period of time so you don't pay top-of-the-market prices. It is a bit like shopping around and timing your purchases so you get value for money.

And there are more sophisticated techniques available to protect your money from falling markets. But these techniques are best left to the experts as they use a combination of cash, equities and complicated devices like derivatives to limit your losses.