If you are an expat with a lump sum to spare, you may want to put it to work investing for your future.
Yet sinking a pot of money into any stock market can be a gamble. The risk is you invest at the top of the cycle, or at worst the day before a crash, only to watch your investment plummet. On the other hand, you may hit a market low and make rapid gains.
The market is a turbulent place, and it can be anyone’s guess in which direction the pendulum will swing.
Timing the market
Trying to do this – getting into the market before it goes up, and out again before any sudden slump – is typically considered a fool’s game. Besides, long-term gains are often made up of just a few days of stellar returns, and these are unpredictable. If you are out of the market when they occur you miss out on the upside.
Conventional wisdom suggests that drip-feeding money into the market to reduce the risk of sudden reductions in value is best. The argument is that by investing on a regular basis, timing is less of an issue. If the market is falling, you receive more units for your investment each month, seeing some benefit from volatility.
The pros of a lump-sum
However, investing a lump sum early gives your investment pot a head start. It will have a good chance of ballooning over the years to produce a substantial fund, providing you are prepared to wait. A lump sum investment can pay off, if you know where to put it and seek the right advice.
Even if you invest before a sharp market dip, provided you have a medium to long-term timeframe you have a good chance of making up any losses. As the popular saying goes, time in the market matters more than timing the market.
History shows a recovery can take years, or even decades in the most devastating scenarios. From to the Great Depression in the US through to Japan’s lost decade in the 90s, which saw its stock market spiral down with the bursting of asset bubbles, bouncing back takes time. Even when recovery does take place, there is no guarantee you will get back your initial investment.
Yet a carefully constructed diversified portfolio will help boost gains by investing in a broad range of assets that can shelter you from market storms.
Tax implications
Investing a lump sum as an expat can prove particularly challenging, with tax and currency hurdles to consider. You need to know how your investment will be treated in your particular jurisdiction and without advice this can be very difficult to establish.
You tax status as an expat can be a double-edged, offering both benefits and disadvantages depending on your location. You may benefit from generous tax treatment of your assets in some popular destinations, yet you may also have to take into account any potential liabilities from your home country.
Income tax rates vary widely. They may be tiered like the UK, or low – such as Guernsey’s maximum 20% rate. Then there are some places where expats do not pay a penny, including The Cayman Islands and Monaco.
With the correct financial planning you can maximise any tax-efficient opportunities available to you.