Has Your Offshore Pension Let You Down?

On the 19th of April 2016, I spoke to a group of international teachers in Muscat, Oman. 

Many owned offshore pensions.  If you’re a non-American expat, odds are high that you own one too.  If you’ve followed your portfolio’s performance, you might be tempted to actually punch your advisor in the nose.

Anyone who has added monthly investments to the stock market should have made money over the past 3, 5, 10, and 15 years. 

But too many investors in offshore pensions haven’t made a penny.

Here’s proof of what investors should have made in global stocks over the past 3, 5, 10, and 15 years. 

I used the service at portfoliovisualizer.com.  Assume you invested regular sums into a U.S. stock index and an international stock index. 

This would give you exposure to the entire global market:  no speculation, no trading, no favoring one economic sector or geographic region over another.

U.S. stocks make up about 50 percent of the total value of all global stocks. International stocks make up the rest. 

So let’s see how $1000 invested monthly would have grown in the global stock market during the past 3, 5, 10 and 15 year periods.

$1000 Invested Per Month

$500 Into a U.S.  Index; $500 Into an International Index

Ending January 1, 2016

Source:  portfoliovisualizer.com

Most of the offshore pensions that I have seen haven’t made money–even after the loyalty “bonuses” that many investors received. Here are a couple of examples. 

This first offshore pension is a Friends Provident plan. 

I’ll call the investor, Steven.  He started to invest regular monthly sums into the plan on December 28, 2009.  You can see the screenshot that I took of his statement below.

Screenshot of Friends Provident Statement

Two things should pop out. 

First, despite adding regular sums every month, Steven has made less than $1000. 

He has contributed $49,990 since December 28, 2009.  On January 28, 2015, the portfolio was valued at $50,871.51.

The second poke to the eye is the portfolio’s lack of diversification. 

There’s no exposure to the world’s biggest market, the United States.  There’s no broad exposure to Europe either.  Instead, the portfolio is a lopsided mess of funds that were used solely for the purpose of impressing the client. 

The salesperson wanted a commission. 

It was December 2009.  He looked at funds and regions that had the best recent track record.  If he promised such returns in the future, he could make his sale and bag his commission. 

His portfolio is tilted heavily towards Asian stocks. 

Again, it has no exposure to Europe or the United States.  Here’s why.  From mid 2002 until 2008, Asian stocks gained well over 100 percent.  Below, note the three lines.  The top two lines (the orange and blue ones) both represent Asian markets.

The green line represents the U.S. market.  During that time period (2002-2008) U.S. stocks had gained just 55 percent.  That’s why this salesperson failed to include the world’s biggest market in Steven’s portfolio.

2002-2008 Asian Stocks Crushed U.S. Stocks

Source:  Morningstar.com

But building a portfolio based on yesterday’s winners is one of the most foolish things somebody can do. 

Look what happened after Steven started his portfolio in December 2009. Asian stocks struggled. 

U.S. stocks (see the yellow line) gained 121 percent.  Asian stocks gained just 34 percent (see the orange and yellow line).

Steve’s high investment fees added further pain.

Asian Stocks Versus U.S. Stocks

December 28, 2009-April 20, 2016

Source:  Morningstar.com

Instead, investors need to diversify. 

They need to recognize that yesterday’s winners could be tomorrow’s losers.  In fact, that’s often the case. 

Below is a table of Emerging Market returns.  Each color represents a different country’s stock market. 

Can you see a pattern between geographic regions that performed well in the past and again, in the future?  If you see it, you’re fooled by randomness.  No such pattern exists.

Emerging Market Returns

Source:  The Novel Investor

Let me show you another table, with developed markets this time. 

Do you see any pattern?  None exist.  If anything, the winning markets during one time period are often among the losers during the next.

Developed Market Returns

Source:  The Novel Investor

Compared to broad global index funds, with no favoritism to any geographic sector, how did Steven’s portfolio perform?

Global Stock Index Funds
Compared to Steven’s Friends Provident Account

Instead of ending up with $73,725, Steven ended up with just $50,871. 

That yawning gap came after fewer than 6 years. 

Most offshore pension portfolios reveal much the same thing.

This second offshore pension is a Zurich International Vista Plan. 

Let’s call this investor Lisa.

She received a “bonus” from the firm.  Did it help?

Zurich International Vista Plan
October 1, 2010 – April 8, 2016

Lisa contributed a regular monthly sum from October 1, 2010 to April 8^th, 2016.  Like Steven’s portfolio, heavy fees weighed it down.  It was also heavily weighted in yesterday’s winners.  Remember, the advisor needed to make “the sale.”

Lisa did, however, receive a bonus of 6000 GBP for investing in this platform. She has invested 38,400 GBP of her own money, plus 6000 GBP as a bonus.

In total, 44,400 GBP has been invested in the account. 

But the portfolio is valued at just 34,605.25 GBP.

Even when adding the bonus, Lisa lost money. 

Here’s how much she would have gained, if she had invested the same sums into global index funds.

Global Stock Index Funds
Compared to Lisa’s Zurich International Vista Portfolio

Investors should avoid “offshore pension” platforms for three reasons:

1. Costs are ridiculously high. Investors end up paying 4 percent or more each year in total fees.   If the stock market averages 7 percent, such investors would be giving up 57 percent of the stock market’s profits to the fee monster (4 is 57% of 7). If stock and bond markets averaged 4 percent, investors wouldn’t make money (4 is 100% of 4).

2. Commission-hungry salespeople are the mouths behind the sales. As such, they will do almost anything to get you to sign on the dotted line.  That means showing you a series of fund charts that have done well in the recent past.  Most of the offshore pensions that I have seen are stuffed with yesterday’s winners.  Few demonstrate global diversification across a series of different geographic regions.  Yesterday’s winners often become tomorrow’s losers.  True diversification might not make a sale.  But it’s responsible portfolio allocation.

3. Investors are often stuck in their products for a predetermined number of years. If they try to get their money out before such a date (often many years into the future) the company will slap the investor with a penalty.

Most investors find that it’s best to take the hit.  Yes, the penalty hurts.  But a low-cost diversified portfolio of index funds should eventually surpass the fee burdened offshore pension account.

So what should you do with your money?

There are a number of options. 

Do-It-Yourself Investors could use one of the brokerages in the table below. 

These firms don’t give advice.  But my book, The Global Expatriate’s Guide To Investing lists the specific ETFs (index funds) that each respective nationality could buy.  Save your money.  Borrow the book from a friend.

DIY (DO-IT-YOURSELF) INVESTORS

Below, I also include ethical firms that will invest money for you. 

Each of the firms I list builds portfolios of index funds. 

INDEX FUND INVESTMENT ADVISORS / FIRMS FOR AMERICANS

INDEX FUND INVESTMENT ADVISORS / FIRMS FOR NON-AMERICANS

Please look at which firms accept clients of different nationalities. 

For example, AES International won’t accept U.S. clients.  WealthBar will only accept Canadians.  Creveling & Creveling will accept every nationality.

It’s time to put an evidence based investment plan to work.  That means a low cost diversified portfolio of index funds. 

Image by Pixabay