Dave Deruytter from ING explains the principles of investing to helps expats make wise investment choices.
Whatever one does with his or her money, there will always be consequences. In the first place your money should serve to provide you and your loved ones with a decent standard of living. What is left can be spent on projects like a company, a house or pension planning. The rest can be invested based on your investor profile, and the tax implications can be studied or optimised.
I will focus on the key principles of investing as a private investor in this article.
With over 50 years of experience in advising expats on their finances, ING offers a range of banking, insurance and financial services to professionals moving to Belgium - from bank accounts to mortgages and advice on the Belgian pension system.
How to invest wisely
The investment portfolio theory says that the diversification of your investments should not only lead to a higher return on your portfolio but also to a lower risk profile in the long term. Therefore putting all your money in one asset may not be the best of options. Still for an entrepreneur who believes in his or her business project it is understandable that this is the case, at least at the start.
It is important to know who you are as an investor and what your time horizon is before deciding on the allocation of the investment money in different asset classes. For that reason banks or financial advisors are obliged to study your risk profile, say your risk appetite for, or knowledge of, investments. What do you know about the different financial products,
what is your experience with them, how would you react to a fall in the value of an asset, and importantly, how long can you do without the money? The less risk is to be advised.
Eventually you will be categorised as a secure, moderate, balanced, dynamic or aggressive investor. Roughly saying that means you should take 0 percent, 25 percent, 50 percent, 75 percent, or 100 percent in risk assets in your total investment portfolio. The first type of investor, the ‘secure’ one, could be someone with 100 percent of his or her assets on savings accounts, the latter, the ‘aggressive’ one, with 100 percent on the stock market or even a part in derivative financial products.
It is important to mention that real estate has its place in a diversified investment portfolio. However a direct investment in one real estate asset, an apartment for example, is illiquid and not diversified as compared to a real estate investment fund, investing in many different real estate assets.
A good example of a long term investment for a 30-year old person is, for example, his or her pension plan. Indeed it should not be paid out before another 30 years at least, after the age of 60. But the idea of the plan is to live of it by then. Thus it is an investment with a clear purpose and does not concern random savings or investments.
Both your risk profile and your time horizon will change with age or time. A yearly update of your investor profile is thus useful.
In conclusion it is good to remember to diversify your investments and to invest according to your risk profile and time horizon. On top of that it is important to shy away from offers that are too good to be true. Either you missed the catch in the small print of the dream deal or someone is trying to steal your money. Last but not least it should be highly discouraged to borrow to invest in risk assets. It shouldn’t feel like betting the house.
Dave Deruytter is head of expatriates at ING Belgium and has first-hand experience of living as an expat around Europe. Dave boasts more than 30 years of experience in expat financial advice on everything from bank accounts to insurance and real estate.Join us