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You are here: Home Finance & Business Banking Expert tips: How to get a decent return on your savings
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18/09/2010Expert tips: How to get a decent return on your savings

Expert tips: How to get a decent return on your savings With interest rates still at record lows, savers are looking around for better returns. Expatica financial expert Craig Welsh advises expats to plan their savings carefully, and offers some tips on how to build a diversified portfolio.

British expat Tom Wilson, 38, moved to Amsterdam from London two years ago. He has a French girlfriend and they have decided that, within a couple of years, he’ll move to Pairs to join her. He has savings of around EUR 60,000.
 
Time matters

Before leaving, Tom needs to decide if he wants to put his money aside, say for three to five years. If he does, then he needs to be clear about his risk profile. Money that may be required in the short-term should be left in accessible cash savings accounts.

Establishing a risk profile

Understanding the relationship between risk and reward is fundamental to making sound investment decisions. When establishing a risk profile, Tom needs to reflect on whether he is prepared for his money to fluctuate and even see a reduction in its value for a certain time.

If people are not comfortable with the value falling as well as rising, then by definition they are very cautious; a risk profile usually ranges from cautious, through balanced, to adventurous.

Before doing anything, as his financial advisor I would sit down with Tom, fully analyze his situation, and establish his risk profile.

Constructing a portfolio

The next step is constructing a portfolio.

The most important rule when building up the portfolio is diversification and that just means making sure that you diversify different assets – basically, not put all the eggs in the same basket.

There are five main classes, and a well-diversified portfolio should include all of the main asset classes:
  • cash
  • bonds
  • equities (shares)
  • property
  • commodities
The main reason for including all five assets classes is that—as we’ve observed over the last two or three years--they are not all moving in the same direction; so if stock markets go down it doesn’t mean that everything else goes down with them.

There are some ’protected’ funds which may be suitable for Tom, depending on his Risk Profile. These are investments which can offer a degree of protection if markets are falling, but still offer the potential for long-term growth. It is important, however, to check how liquid these funds are (i.e. how easily you can get money out) and where the funds are domiciled and regulated.

The importance of regulation

Ensure that the assets you invest in are properly regulated. If you are looking at collective investments such as mutual funds, check where the fund is domiciled. This information is usually available online or on the fund documentation. This is important because it affects the level of consumer protection.

For this reason we would normally recommend sticking to funds which are domiciled and regulated within the European Union. This gives the investor a greater level of protection.

 

Diversification within asset classes

It is important to ensure that there is also sufficient diversification within each asset class. For instance, some investors make the mistake of only investing in equities in one country or region.  One way of diversifying your equities’ exposure is to use a ’global equities’ fund. Similarly, one area which has attracted a lot of interest recently is Emerging Market bonds. These are fixed-interest bonds but based in emerging economic regions such as Asia or Latin America, where there remains huge demand for credit and many markets are more liquid than in the West. This asset class has performed extremely well recently and so it may be worth ensuring your bond allocation includes Emerging Markets exposure.

Do NOT try to time the market

It’s difficult to manage a portfolio, even if you are a professional investor who manages the exposure of portfolios to different asset classes. It’s practically impossible to time the market—trying to do so is a common investor mistake.

For example some equity investors make the mistake of waiting until markets start to rise before they invest. They want to wait until others have started to buy and then feel safer by “following the herd”. But of course by holding off until then, they have often missed the best of the rally. The other side of this of course is when people react nervously and sell out of equities after they have fallen. The most successful long-term investors have been able to resist the temptation of making snap decisions and have managed to take advantage of markets when they are at a low point. Warren Buffet, one of the most successful equity investors, sums this sentiment up by saying, “be greedy when others are fearful, and be fearful when others are greedy”.

Get checked every six months

The next step is to make sure that your portfolio is reviewed regularly.  We review our client’s portfolios every six months or so; reviewing performance and suitability of assets. Most of the time, people have access to online funds so they can log in any time and see how things are doing.

Focussing on taxes

So back to Tom Wilson, our British expat who is planning to go to France:
We have to examine the tax implications of his investment decision. Because Tom intends to move to France we can look at the French system and try to advise on how best to hold his assets tax efficiently.  For example, if he holds his assets within an ’assurance vie’ wrapper, he may be taxed more beneficially than if he holds his shares and bonds directly. 

So there are two aspects of this scenario: which assets does he put into his portfolio and what is the most tax-efficient way to hold his assets?
We would advise that he builds a fully diversified portfolio, suited to his Risk Profile, and recommend that he uses a French-compliant product with assurance vie status. 

 

Craig Welsh/ Expatica

The Spectrum IFA Group (www.spectrum-ifa.com)

The advice above is based on a Case Study example. A full review of an individual’s circumstances would always be carried out by Spectrum IFA Group before any advice and recommendations can be given.


 




1 reaction to this article

Filippijns posted: 2010-09-27 15:24:22

as for me the lowest risk (no strings attached), easiest manner and cheapest (no admin fees) to invest savings is through the internet banks that give the highest rates (still better than the usual abn, ing and rabo).

anyway, the dutch central bank guarantees up to 100K euros per account per bank and they have weathered icesave and dsb thus in principle any internet bank, as long as they offer the highest rate, is a good deal.

1 reaction to this article

Filippijns posted: 2010-09-27 15:24:22

as for me the lowest risk (no strings attached), easiest manner and cheapest (no admin fees) to invest savings is through the internet banks that give the highest rates (still better than the usual abn, ing and rabo).

anyway, the dutch central bank guarantees up to 100K euros per account per bank and they have weathered icesave and dsb thus in principle any internet bank, as long as they offer the highest rate, is a good deal.

 
 
 
 
 
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