Becoming financially secure is so simple that almost no one wants to believe it: Save regularly, reinvest your interest and dividend income, maintain your contributions even during down cycles, and you will accumulate wealth. It is that simple.
The response to the previous two "Net Worth" articles has been very encouraging. Expats of all ages have inquired about financial planning, common queries being whether it is ever too late to refocus or, in some instances, to get started. The answer is definitely no, it is never too late. The younger you are when you start, the easier it will be to achieve your financial independence in a timely manner. More advanced expats have also approached me and asked if they can still achieve a meaningful plan when starting in their forties, fifties and even sixties.
Some younger expats following this topic have been keen to implement a strategy and start turning what were previously just ideas into action. Going about this can be daunting and making a start is the obvious first step. The very first action to take is to establish an offshore bank account in a tax haven where you can start to accumulate cash savings. Many professional advisers can help you with this, at no cost to you.
Once that box is ticked, you need to see a financial adviser to evaluate your entire life plan and see what strategy he or she recommends to help deal with events which you anticipate are most likely to occur in your lifetime. The financial impact of all of these changes will need to be taken into account.
Once you have a cash reserve, it needs to stay where it is as your rainy-day fund. Then you can start the serious business of creating wealth using investment solutions that are available exclusively to expats.
There are two mechanisms in particular that can, over time, work to your advantage. These are compound growth and currency (of any type) cost averaging.
Compounding means that you enjoy growth on growth. This makes your investment pot grow much faster than you may at first imagine. For example, let's take a sum of US$10,000 (314,000 baht). If you place this in a bank at a 3% interest rate and withdraw the interest each year you will enjoy an income of $300 per year. At the end of 10 years you will have a capital sum of $10,000 left and will have enjoyed the income of $300 each year, totalling $3,000. On the entire deal you will have made $13,000 in total.
However, if you had invested this at the same rate of 3% and left it to grow, your capital at the end of 10 years would be $13,494. That is 16% more than the income withdrawal. If you multiply this over a number of years and apply it to your total investment savings it will provide a significant advantage to you.
An even more powerful factor than compound growth is the marvel of currency cost averaging (usually called dollar cost averaging). This is the power of buying low and enjoying subsequent price increases to your advantage. This principle can be applied to our everyday lives. For example, if the price of rice declines, we will buy more rather than wait for the price to increase.
Let's say you buy shares in very similar companies. They will always have different results and their share prices will never be the same. So, let us invest $500 per month in company A and $500 per month in company B. We decide to do this each month for 10 years. At the end of the period we have invested a total of $60,000 in each company. The share price in company A grew steadily in a straight line, as the chart shows, while the price of shares in company B fell but then recovered toward the end of the period.
Both companies start and end at the same share price but company B dips during the period and then bounces back sharply in the second five years. If you look at the chart and ask which company will have produced the better return for a regular investment, it may appear that company A would have come out on top. However, you would be incorrect. This is because when the share price in company B declined, you were actually buying more shares than you were in company A. Many investors who eventually see this are then even more surprised when they find out the magnitude of the return difference.
In this example, at the end of the 10-year period, $60,000 has been invested in each company.
The final value of the shares in company A is $95,000 while the shares in company B total a whopping $148,000. The double advantage of dollar cost averaging and then compound growth make this possible. The reality of the 2008 financial crash and subsequent ongoing recovery has provided advantages for many equity investors in this way. If you are one of these, you will see a varying advantage for yourself depending on the history of your own investments at the time of the crash. Some very short-sighted expats stopped contributing to their plans and waited until unit prices rose again. They were foolish, suffering even further rather than taking advantage of the situation.
When you make investments of this type rather than choose a single company, you will be wise to take professional advice and use a designed vehicle that invests into mutual or other investment funds. The advantage of this is that such funds will invest in a greater number of companies. Thus if you choose a specific fund investing in, say, Far East equities, you will be investing in around 100 companies all over Southeast Asia. This gives you the advantage of participating in areas where there are great winners while limiting the downside of the losers.
It also allows a multi-sector advantage so that you are not specialising in just one asset class. By combining your investment across a number of different funds, for your regular contribution, you can gain great advantages in different geographical areas and sectors as well. So, our $500 per month could be split over a number of geographical regions and asset classes, allowing for participation in equities, property, bonds, commodities and some other areas that become available from time to time.
The use of these strategies can significantly enhance your investments. They will also accelerate your financial planning capabilities and increase your overall wealth pool. No matter what stage you are at in your career or whatever your age, it is never too late to start accumulating wealth, so see a professional adviser today and get on the fast track to wealth creation.
Andrew Wood has been an expat in Asia for 34 years and is executive director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back nearly 10 years. These articles, which cover the complete A-Z of financial planning, are available to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.