The importance of long-term investment or saving needs little explanation. The wealth of benefits afforded to individuals through effective long- term investing is profound but can be a complex process where investors are faced with complex structures, excessive fees, paperwork and other frictions that detract from results.
There are many international investment structures available in the market and are typically driven by two main considerations, regulation and tax treatment, both of which vary significantly from jurisdiction to jurisdiction.
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
Taxation of investments results in a realized reduction of capital that limits the potential for future growth. The compounding of investment growth is a central principle in effective long-term investment. For compound growth to operate optimally, it is critical to ensure that as much of the growth generated over time remains within an investment.
While taxes can vary substantially from country to country, long- term savings are frequently subject to two broad kinds of taxation; capital gains tax and income tax. Income and capital gains taxes are typically levied against investors when receiving investment income (interest or dividends) or on selling and buying different investments. A different type of tax, estate duty or situs tax, is levied against intergenerational asset transfers.
It is important to examine investment issues logically, and try to reduce emotional decision-making.
Time horizon of the investment
The next issue is the time horizon of the investment: in short-, medium- or long-term assets. Research has shown that up to 100% long-term discretionary growth assets could be invested overseas. Below is an explanation of the different possible components of a well-structured investment plan.
- These are usually assets where funds may need to be made available quickly. An important risk to consider is volatility, the measure of uncertainty associated with the investment. The investment may be negatively affected if stock markets lose value because the money might be needed just as the decline is at its worst. Investments such as money market funds might be appropriate. These should be in the local currency as the funds may be needed in the short term.
- These are usually assets where funds may be needed in the medium term, for example, for a new car. An important investment risk to consider is correlation, the extent to which the values of investments move in relation to each other. While some capital growth is required, the investment should not be negatively affected when stock markets lose value. Investments like longer-term bond funds might be appropriate. Again these should be in the local currency as the funds may be needed in the short to medium term.
- These are usually assets set aside for long-term needs, such as a child’s studies or retirement. An important investment risk to consider is inflation. The investment should allow sufficient growth in excess of inflation to deliver capital growth over time. Equities or shares are best suited to deliver this growth and there is certainly an opportunity to invest some of these assets directly overseas.
One major concern for investors is currency fluctuation. Thinking in local currency may be problematic, as emerging market currencies tend to be volatile. Instead of the local currency, investors should use the currency of their international investments as a reference. By thinking in USD/EUR/GBP, better decisions can be made because the reference tends to be more constant. International investment does not aim to make money from currency fluctuations, but from investment performance.
Considerations before you invest internationally:
- Direct international investment should be considered, regardless of the local economic climate.
- Structure is of critical importance, especially with regards to tax treatment and administration.
- Up to 100% of the long-term assets in an investment portfolio should be in a direct international investment.
- The recommended investment horizon is longer term up to 10 years.