Expatriate Investors – What Your Financial Advisor Probably Doesn’t Know: Part II

In my last post, I argued that it doesn’t make sense for expatriate Americans to invest in actively managed funds.

For starters, the odds of finding funds that beat the stock market indexes are slim.  And even if you get lucky, and end up beating a stock market index—pre-tax — it isn’t likely that you’ll beat the indexes, after taxes.

Expatriate Americans who want to invest more than $5000 a year, must direct their savings (above $5000) into non IRA, fully taxable accounts.  There’s no way around that.

Where A Salesperson may lead you astray

Many of the financial advisors who service their American clients in the South East Asian region (for example) are stuffing their client’s accounts with actively managed mutual funds.  Why?  I could be entirely cynical and suggest that they’re acquiescing to their conflicts of interest.

But I don’t think that’s entirely true—not for all of them.

The vast majority, I believe, don’t really know the damage they’re causing.

As I showed previously, if a fund has a long term track record of matching a market index (which is no small feat) they’re destined to lose an extraordinary amount, after taxes, as you can see here

But can we data mine?

Data mining is a fun term that describes what many financial advisors do.  They seek out funds that have had great, historical past records, and then they say, “See, these funds have done really well.  These are the funds that I would buy for you.”

First of all, choosing actively managed funds for the future, based on their returns in the past, is a fool’s errand.  The Wall Street Journal’s Jason Zweig suggests that the odds of doing so are about as high as the odds of the Abominable Snowman and the Easter Bunny showing up at your next cocktail party.  …read more

But let’s “data mine” shall we?

Let’s look to the past and find a fund that has beaten the stock market index by nearly one full percentage point annually.  This, of course, is a huge margin. 

And here’s the fund that I promised, in my last post:

The American Funds AMCAP A (AMCPX)

Vanguard’s total U.S. stock market index has been around since 1992, so we’ll compare the AMCAP fund to the total U.S. index.

Fund

Amount invested in 1992

Amount invested after sales fees

Average percentage gain

Pre-Tax Value, April, 2011

Estimated annual taxable liability

Est. Post tax annual return

Est. Investor’s value in April, 2011

Vanguard Total stock market index (VTSMX)

$10,000

$10,000

(no sales fees for Vanguard)

8.64%

$48,284

-0.56%

8.08%

$43,768

American Funds AMCAP A (AMCPX)

$10,000

$9,425 (after 5.75% sales fee)

9.63%

$54,067

-1.74%

7.89%

$42,329

Source:  Morningstar; Source of tax rate, extrapolated from Bogle’s assessment of taxable liability based on a fund with a 30% turnover, and proportionately reflected by the rate of return above.

The American Funds fund company is actually quite disciplined.  In terms of tax efficiency, they’re far better than most U.S. fund companies because they don’t trade the stocks within their fund with as much fervor as most American fund companies.

But for American expatriates, they aren’t good enough.  Even when we “data mine”—finding a fund that has historically done well, we find that after taxes, it hasn’t been the standout many salespeople would like to hope.

You can see, above, that after taxes, the actively managed fund we selected through the rear-view mirror would have underperformed Vanguard’s total stock market index from 1992 until 2011.

American Expatriates won’t likely find mutual funds that will beat a collection of stock market indexes, going forward.

And if they do (as you can see, with the example above) they’ll still likely lose to the indexes over a long period of time.

Education is an obvious weapon against exploitation.  If you’re an American expatriate, don’t let anyone convince you to buy actively managed mutual funds.

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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2 Responses

  1. Ravi Gupta says:

    Great article! I'm a big advocate of lower cost funds like index funds / ETFs because in the end they'll save you a great deal of money. It's amazing what type of fees mutual funds can tack on later on. As mentioned that 5.75% sales fee is ridiculous and could be a years earning in a bad market. It boggles the mind how any advisor could sell a fund like that.

    -Ravi Gupta

  2. Ravi,

    Thanks for the kind words.

    You're absolutely right. From an ethical standpoint, it would be tough to justify a fee like that. You would have to make 6.1% on your money in the first year, just to break even after paying a 5.75% load.

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