Most Expatriate Investors Lose To A Box Of Cornflakes

Most Expatriate Investors Lose To A Box Of Cornflakes

By Andrew Hallam

Originally published by AES International  

Imagine this. Ten years ago, you invested £10,000. 

Today, it’s worth £12,500.  Did you make money?  It seems like a silly question.  But if this happened, your investments would have lost to a box of cornflakes.

Inflation is a lot like wrinkles, greying hair and loose skin.  It’s a pesky part of life. Every decade, the goods and services that we buy get more expensive. Inflation in the UK has averaged ­­­2.29 percent over the past ten years.  Inflation compounds annually.  In other words, if a cart of groceries at Tesco cost £100 ten years ago, those same groceries would cost about £125 today.

That’s why, if you had invested £10,000 ten years ago, and it were worth less than £12,500 today, you would have lost money–in terms of buying power.  Such is the case with most expatriate investors who live in the Middle East.  The rising cost of breakfast cereals (to name one example) beat their investments silly.

I’ve been a financial journalist for 15 years.  In 2011, I wrote an international bestselling investment book, Millionaire Teacher.  It didn’t focus on expatriates.

Later that year, I received an email from a British software developer who lived in Abu Dhabi.  He asked, “Could you look at my investments?” I examined his portfolio and said, “There must be some mistake.  No investment scheme, to my knowledge, charges fees as high as this.” I felt sorry for the guy.  Somehow, he was stuck in the worst financial product that I had ever seen.

He paid annual investment fees of about 4 percent per year.  The money that he deposited during the first 18 months attracted total fees exceeding 9 percent per year.  What’s worse, he couldn’t sell the total proceeds of his portfolio without paying a 60 percent penalty. 

I soon learned, however, that this unfortunate story wasn’t an exception.  It was the norm among expats who live the Middle East.  They pay the world’s highest investment fees.  It’s no coincidence that such products pay the highest sales commissions.

In 2001, Nobel Prize winner in economics, William F. Sharpe, published The Arithmetic of Active Management.  Here’s the premise.  The typical investor in stocks will earn the same return as what the stock market makes, after fees.  In other words, if the stock market averages 7 percent per year, investors that pay 4 percent per year in fees would earn about 3 percent per year.

But inflation is greedy.  Long-term (historically) the costs of goods and services rise about three percent per year.  This is how boxes of cereal thump expat investors in the Middle East. Unfortunately, reality is even worse.  Most of the region’s financial salespeople aren’t Chartered Financial Planners (CFPs).  More often, they’re former used car salesmen-types who are out for easy money.  They know little, if anything, about how to build responsible investment portfolios.

To impress clients–or simply because such salespeople don’t know better–they often stuff their clients’ portfolios with yesterday’s winners.  But the SPIVA Persistence Scorecard shows that high-performing funds during one time period rarely maintain their winning ways.  Instead, investors should build diversified portfolios of low-cost index funds.  By doing so, and rebalancing once a year, investors don’t end up swimming with thirty-pound ankle weights.

Fortunately, the media is catching on.  In February 2017, The National invited me to a roundtable discussion.  They wanted to discuss the contractual savings schemes that are sold in the Middle East.  They invited representatives from firms such as Zurich International, Generali Worldwide, Friends Provident International, RL360 and Hansard International.  But they declined to show up.

Representatives, however, from the deVere Group and Globaleye (two brokerages that sell many of the aforementioned investment schemes) elected to attend.

I challenged their products, explaining how it was virtually impossible for their investors to beat inflation.

If you have fallen for an expensive investment trap, you’re certainly not alone.  Media exposure is picking up steam.  In June 2017, I explained these schemes again in an interview with Dubai Eye radio.  

These investment products will eventually face extinction.  Much like the Tyrannosaurus Rex, they won’t be able to continue biting investors in the butt.

The less you pay in investment fees, the more money you will make.  And the past five years have been great for stocks. We can best measure stock market growth by looking at the global market.  Doing so would include stock returns from more than 40 different countries.  Some of those countries’ stock markets have recently done well.  Others have done poorly.  But a global stock market index gives an average of them all.

Over the past one-year period ending October 20, 2017, a  £10,000 investment in a global stock market index would have grown to £12,890.  That’s a one-year return of 28.9 percent.

If £10,000 were invested three years ago, it would have grown to £13,277.  That’s a total three-year return of 32.77 percent.

If that same £10,000 were invested five years ago, it would have grown to £16,474.  That’s a total five-year gain of 64.74 percent.

Unfortunately, most Middle East-based investors don’t earn what they deserve. It’s tough to retire well when your money loses to a box of cornflakes. 

Order Andrew Hallam’s latest book, Millionaire Expat, on Amazon.