Financial Planning and Pensions for Expat Oil Workers

If you have any questions about the above, my contact details are  [email protected]

Oil and gas is one of the biggest expat sectors in the Middle and Far East, and beyond.  Quite a large amount of expats in this sector, from my experience, have complex financial and insurance needs which in some cases are specific to their sector.  I look at a few below:

1. Complex Pension situation/considerations 

Some expats are part of company schemes.  However, like most FTSE 100 companies, BP and Shell have huge pension deficits.  They aren’t alone.  Despite the recent spikes in prices, the number of companies that have gone bankrupt or slashed their pension schemes, has gone up sharply in the North Sea, Far and Middle East and beyond.

This means that it makes it imperative to consider whether to transfer your pension overseas.  Often the benefits of doing so are huge, and can be done through some of the UK and world’s largest pension providers which have been approved by HMRC and other tax authorities.  EU nationals working overseas, especially Dutch, Belgium and Irish citizens, are also entitled to similar benefits.  For German, Nordic and and other expats, it can be more difficult.

If you don’t already have pension arrangements, this makes saving for a pension even more important.  The lifestyle of oil and gas, with 6 weeks on and off very common, make bad spending habits very common.  It isn’t uncommon for expats on huge packages to spend it all!  As age discrimination happens more commonly in many Asian countries than in the West, it might happen whereby you lose your job or contract isn’t renewed due to age. 

2.  Health Insurance 

People in oil & gas should take protection against ill health and income particularly seriously, especially in some job functions.  Your employer should provide health coverage, of course.  However, almost all insurers for expats, won’t cover pre-existing conditions at a reasonable rate if you haven’t already been insured through them.  In other words, if you have a contract in 2018 and are insured by AXA through your company, if you lose your job in 2020 and got cancer or a heart attack in 2019, you won’t be able to easily get insurance to cover those conditions unless you are part of a group scheme.  So spending 1%-2% of your insurance on your own health insurance makes sense.

3.  Income protection due to ill health

The average age for expats claiming illness insurance is 43-44 in Asia, not 54 or 64! Oil and gas has it’s stresses just like all jobs, but also some specific threats to your health.  Like on health insurance, protecting your income if a disability or serious illness occurs, can be incredibly cheap, provided you don’t already have pre-existing conditions.  

4. Life cover. 

If you have kids or dependents such as elderly relatives or a partner who doesn’t work, you need life insurance.  Insurance though is dead money if nothing happens.  Therefore, it makes sense to get as many benefits as possible, for the lowest possible price.  If you can get your income, life and health insured for 5% of your income, it is a non brainer and helps you sleep at night.

5.  Income 

If you are 55+ and are thinking about retirement, you should think about how your investment portfolio (which is hopefully relatively big by now) will fund your retirement.  What income options exist and their associated risk and reward is important.

6.  Property at home or abroad.  

This is part of estate planning and inheritance, but depending on that, investing in property doesn’t always make sense.  It can do, depending on the area, whether you can find a buyer and so on. Expat mortgages can be reasonable and arranged.  

Also depending on how many days a year you are on the rig, this will affect whether you are considered a resident or not.  As an example,  if you spend more than 90 days a year in the UK, even if you live in the Middle East, this will sometimes affect whether you are considered an expat for property and investing purposes.

7,  Your current pension or savings.  

How well is it performing?  Do you have too much money in the bank earning close to 0% or an underperforming portfolio?  The academic evidence suggests time in the market is more important than timing the market, and therefore waiting too long to use your money productivity is a long-term mistake, regardless of the short-term.

 

 

Stock Picking vs Index Funds: Is Stock Picking Ever Rational?

Please contact me at  [email protected]  if you have any questions about this article or questions in general.

Consider something for a moment.  If you stock pick (individual stocks) rather than buying funds, you have an 80%+ chance of not beating the market over a 5 year period. That goes down to about 98%+ over a 40 year + investment career.  There are many reasons for this. 

Even small costs of buying and selling build up.  Good short-term returns, moreover, increase egos, and complacency comes into play. One of the biggest reasons is that the information is all there transparently, so there is no such thing as a free lunch. Remember, all the information about companies is publicly available and there are people whose job it is to look at this information and weight the pros and cons of all that information.

Take tech as an example.  It was true in the 1990s that those IT geeks who correctly predicted the future, could have made tones of money. Certainly early investors in Facebook or Amazon did.  However, it would have been madness to put a significant percentage of your wealth in Amazon in 1995. A rational investor can only make decisions based on the information he or she has available at the time.  Predicting the future is almost impossible and those who get it right once, probably won’t next time. This is something cryptocurrency advocates should know too well, considering many believed in hyperinflation and a depression as bad as the Great Depression 5-10 years ago. 

There are so many unknown unknowns and know unknowns for all companies, and especially start-ups. If Amazon’s CEO would have died 20 years ago, or there would have been a huge scandal or employees would have joined a competitor on mass, the company would never have succeeded.  Who knows, maybe Amazon almost went bust early on before they publicly revealed information which only becomes a legal requirement once it goes public.  And more to the point, even though tech has on average done well over the last 20 years, most tech firms have gone bankrupt. 

Buying the market and a broad basket of companies isn’t speculating.  It is just assuming that, like always, in the long-term, the biggest 100-200-300 companies in the US or elsewhere will be worth more money in 10-20-30 years than today.  So regardless of whether in 2050 most of the S&P is financial services, law, consumer goods or even bitcoin mining companies (i doubt that though!), an investor who buys the market will profit.  They just won’t profit as much as somebody who invests 100% of their wealth in the one coin that beats the market!  One of the reasons the average DIY investors only makes on average 4%-5% per year when markets have gone up (historic average) 10% per year, is because they assume they are smarter than others due to `research`.  

It is human nature to think you are smarter than the average, but the academic evidence is clear that enhanced knowledge won’t allow you to consistently beat average market returns.  You will almost certainly beat the market some years, but on average, you will lose long-term.

This whole mania around cryptocurrency is another case in point.  The price could go up or down, but very few people (or any) are buying `a basket of coins` which tracks the average price of the market.  Instead they tend to buy 1, 2 or a maximum of 3 coins. This means, that even if the market increases in the future, many people in the market are engaging in something akin to stock picking.  

Let’s say somebody owns one coin, and that coin is implicated a political scandal after a dictator stashes and it is subsequently outlawed across numerous countries, then the price will go down.  Not to mention, let us imagine for a second the coins become a victim of their own success, they do become a threat to the state’s ability to raise revenue, and therefore becomes a libertarian’s dream.  State regulation will hammer the price.  I have heard some people say the ridiculous phrase that `regulation can’t affect the price`.  That is silly.  Let’s give an extreme example now.  Let’s say in 2019 there is a terrorist attack funded by some of the coins, as terrorists use it to fund themselves.  If there is a popular backlash and the coins are banned globally or even just in the OECD, the price could go close to $0.  Every time a new regulation is announced, the price goes down.  It could be made an illegal offence to own or trade any coin tomorrow or the day after tomorrow, in an extreme event.

The price of bitcoin and other coins may skyrocket, but that doesn’t mean that an investor is irrational to say no to it in 2018.  It is pure speculation and at best should represent 5% of a portfolio if somebody can’t resist the temptation.

3 common financial misconceptions

Having lived overseas for around 7 years, I find the following, and not completely exhaustive list, are the biggest misconceptions many expats and locals have about finance:

1. Stock Markets are more risky than real estate and provide lower returns

Equities are more volatile than real estate in developed countries, but on average, it is a fact that if dividends is reinvested, stocks tend to outperform real estate in the long-term. I am not quite sure where the idea comes from, and found it quite perplexing when people started panicking about a week ago when prices went down 10% (after increasing about 300% since 2009!)

With the exception of London and some top spots, most houses are now cheaper, adjusted for inflation, than 10 years ago, according to the BBC. Even top performing markets such as Canada saw lower gains for real estate against stock prices.

Perhaps it is part of primitive human nature to like something you can touch such as gold or property? Or perhaps people don’t adjust for dividends or don’t calculate the hidden costs of property, which tends to be higher than equities?  Either way, people can have a screwed view.  Volatility and stability are different things.

Property can be a good investment but can only compete with stock markets if you go down the leveraged buy-to-let route.

2. I have enough for retirement

90%+ of people don’t.  Ultimately, you can only take about 4% a year from a lump sum.  $1M sounds like a lot of money to most people, but based on $1M, you can only take out about $40,000 per year.  That is unless you are close to death, don’t care about inflation eroding the gains and possibly running out of cash and/or not having much to leave your kids.

Many wealthier expats who are used to spending a lot of money assume they have enough, but how realistic is it to live off $5000 a month in retirement if you are used to $25,000 as an example?  You should aim for 70% of your previous income to be replaced in retirement, and it is best to not rely on illiquid assets such as rental yields for retirement income.

As an example, if you currently are spending $50,000, you should aim to have at least $35,000 in retirement, which means you need to have around $900,000 on day 1 of retirement.

3.  I should only deal with somebody I know

Many people are with a financial firm because they are friends with the owner, or have been referred to him or her.  That is fine, but sometimes switching can save you thousands or even $100,000 or more, compounded, over a lifetime investing for retirement.  As point 1 shows however, this point is connected to human nature.

People are far more cynical about strangers than they need to be, with some surveys suggesting that respondents believe that there is only a 50% chance of getting lent money returned, when the real figure is 80%-90%.

Manipulative people tend to gradually gain your trust, so apart from a few vulnerable old ladies, most people are not conned by the cold approach.  To the contrary you are more likely to do your homework and be more objective, and less emotional, if you compare 2-3 offers from people you don’t know and have zero feelings for.

If you have any questions about this article please contact me at [email protected]

Why the wealthy spend less on luxury: the 70/30 rule in finance

Last year I started to take fitness and lifestyle more seriously.  Quite a few experts I know talked about diet being more important than exercise.  As exercise makes us feel hungrier, and it isn’t realistic to sustainably try to starve yourself, I was told most fitness coaches tell their clients they need to change eating habits.  

Therefore, 70%-75% of the progress people make in terms of their weight will be down to diet, and only 25%-30% relates to exercise.  This surprised me a bit, and I am sure surprises many people.

It got me thinking.  One of the things I have noticed since being in the finance industry is that many high-income individuals aren’t wealthy.  

I know numerous people who are worth $2M on an income of $50,000 and others have close to zero wealth but are on huge expat packages.

One person I know has consistently made $15,000 per month after tax for about 20 years in South East Asia, and yet has only about $100,000 to his name.

How can this be true?  Well, the truth is good spending habits are actually the biggest source of wealth, compared to earning more.  Michael Jackson was close to bankrupt despite earning around a billion dollars in his careers.

That is not to mention the effect of compounding.  Even though markets historically go up and down, on the whole, they tend to increase over time.  The US Stock Market, the S&P, has averaged a return of 10% before inflation and around 6.5% after inflation.  This benefits people who are consistently disciplined and start investing at a young age.

Take a simple example of somebody who starts investing at age 22 for 40 years. Let’s say they save on average $100. If they get average historical returns, their account will be worth about $264,000 in today’s money when they are 62.  

If they save $500, the account will be worth $1.3M and $1,000 would lead to $2.6M in today’s money at the age of 62.  In reality, even a very well-paid person who has had bad spending habits will struggle to accumulate $1M-$3M if they start investing in their 50s.

Consider an even more startling statistic.  Let’s compare two people who are investing $500 a month and they both get an unexpected lump sum of $100,000 due to inheritance.  

Person 1 invests only $500 per month but spends the 100K, whilst person 2 invests the 100K and the $500 monthly.  In 30 years, person 1 would have around $588,000 in today’s money.  Person two would have $1,350,000 in today’s money…..a difference of $750,000 in real terms by delaying consumption and well over $1M if you don’t factor in inflation!

Perhaps it is unsurprising that many reports suggest that the rich are less likely to buy luxury goods.

The above is a sample from the 6 steps to financial freedom book.

Extra reading 

  1. How to get rich investing

Generali Vision Review: Charges and Problems

Generali Vision was perhaps the most commonly sold savings plan in the expat market, until a few years ago.  But is the plan worth taking out, and what should somebody do who has the plan?

The plan is a regular contribution plan, which can be taken out for as little as 5 years, with 25-30 years also common.  In general, the plan should only be taken out if the person intends to contribute for the full term.  This is because the charging structure is high.  A breakdown of the charges can be found below:

Fees linked to the initial period:  0.3%-2.75% depending on the year of the plan and the term taken out. For example, on a 25 year plan, the charges are 2.75% for the first 5 years, 2% for the next 5 years and 0.3% for the next 15 years.

Fixed monthly fees:   £3

Admin charges:  1.5% annually

Bid/offer spread: (the difference between the buying and selling price) – 0%-2%, only if internal funds are chosen is it 0%.

As you can see, the charges are quite high.  However, if somebody contributes to the plan for every single month without exception, a bonus will be added to the account.  In practice, this means that the plan is expensive (around 4% per year in fees) unless the person contributes every month, in which case the bonuses will reduce the fees to around 1% per year.  Loyalty bonuses are only available on plans of at least 10 years.   On a plan of over 10 years, a loyalty bonus of 5% of any premiums paid will be levied to the account.  After 30 years, somebody saving $500 a month, can `earn` up to $9,000 in bonuses, which essentially is just reducing the fees.

As few people are told about the way the fees and loyalty bonuses work, many customers stop contributing early, therefore not qualifying them for the bonus.  So what should somebody do who has this plan?  If they have been contributing every month, they should be careful before cancelling or stopping payments.  A review should be made, carefully looking at the costs of doing so.  If somebody has already stopped payments and therefore cannot qualify for some of the loyalty bonuses, cheaper and more flexible options exist in the market.

Finally, many brokers levy 2 or more additional fees to the account, which can further reduce fees.  If somebody wants to keep a plan, it may pay to get a review of the account, and see if a better solution can be found.
If you have a Generally Vision plan and want a review, don’t hesitate to get in touch via [email protected]

Life Insurance for Expats in Thailand, Singapore, UAE and beyond. How much life Insurance do you really need?

We all know that anybody can die at anytime, and if you have a dependent, you will want them to be looked after if tragedy strikes.  Even if you don’t currently have children, you might in the future, or might have an elderly parent.  So how much life insurance do you really need?

A good, and basic, rule is to assume that a lump sum from life insurance will yield the beneficiary 4% per year for the rest of their life.  In other words, $100,000 will yield $4000 per year, and  $1M will yield $40,000 and so on.  This does depend on numerous assumptions, of course.  How conservative your loved ones are with money is one consideration, and how they invest the money after the death.

Before deciding on how much life insurance to get, also consider how much debt you have and savings.  Imagine you have person 1, who has a partner who needs $50,000 of yearly income.  This person also has $500,000 in assets that can generate an income such as shares and cash.  Such a person should aim to get $750,000 of life cover, because 50,000×25-500,000 = $750,000.  Now consider person 2 is in the same situation, but they have $50,000 of debt.  In which case, $800,000   of life cover is more sensible.

Of course, these are only rules of thumb. If somebody has an elderly frail parent who is 95, one clearly doesn’t need 25 years of life insurance.  In addition, if one has a partner who is likely to be able to generate their own income, or can partially rely on income from the state, that will also lower the amount of cover needed.

As you can ascertain by now, how much life cover you need is not simple.  That isn’t an excuse for putting it off, however. Be prepared if the worst happens.

Please contact me at [email protected]  if you have any questions on this article

Asset Allocation Strategy

Let us consider, for a moment, some facts. 1). There are many different asset classes such as property, bonds, commodities and equities. 2). Some of these asset classes are liquid and some are illiquid. 3). Nobody can, for certain, predict the movements of financial markets despite the fact that markets have historically risen over time.

These points are important, because it is safe to assume that sometime in your life, the financial markets will be down 10%, and quite possible, as much as 50%. This does not need to trouble long-term investors who can ride out the volatility, and is especially good for those that have cash lying around.

However, sensible asset allocation not only reduces your risk, but it also gives you a chance to benefit from the downsides as well. Let’s give an example of government bonds. Government bonds produced by the US Government and other developed and mature economies are one of the least volatile asset classes.

They usually barely outperform inflation, because investors do not demand much of a risk premium on such a safe asset. It is true, therefore, that bonds over the long-term do not yield as much as financial markets. Whereas the S&P and Dow Jones has historically yielded around 6.6% after inflation, which compounded has made them the best performing asset class, government bonds have yielded barely above inflation.

So why should investors consider bonds? Well for one, having some bonds in your portfolio cushions the blow of any market falls, as bonds usually go up during financial crashes, as they are seen as a safe heaven. Just as importantly, bonds allow you to buy equities cheaply during the crash.

Consider the following portfolio. The value is worth $100,000. 75%, or 75,000, is in international equity markets, and 25%, or 25,000, is in government bonds. Now imagine there is a market crash. The equities go down by 20% to $60,000 and the bonds have risen to $26,500 in the wake of the crash.

Now the portfolio is worth $86,500 and the bonds are worth $26,500 of that, meaning that the bonds are now worth more than 30% of the portfolio. This is important, because investors can now sell 5% of the bonds and buy equities at discounted prices, or even buy another 5-10% if markets fall further. Using this strategy, even if the market only recover back to there previous level, the investor will have more than the original $100,000, because he or she bought at discounted prices when the market fell.

Of course, investors can only make such a trade if their investments are liquid and there are no hefty exit charges for leaving funds. Nobody can sell physical art, property land or many commodities in a day or probably a week, and selling a fund which has a 5% exit charge does not make sense. This illustrates the importance of having a relatively liquid portfolio, where assets can be moved freely, quickly and cheaply from one asset class to another. It means that rational, medium and long-term investors, can actually look forward to buying at lower prices, which will help returns.

Stocks vs Real Estate: 10 reasons not to invest in real estate

During my time working in the investment industry, I have heard a lot of misconceptions about various financial instruments. However, some of the biggest misconceptions are about property. There are good reasons to own property, especially one family home which isn’t leveraged through mortgage payments, but this blog will focus on some reasons why not to invest in property.

1 – Herd mentality

The fact that `everybody` thinks property is a good idea is one reason why not to invest in it. Warren Buffett’s observation that `if too many people are on one side of the boat, you should be worried`, couldn’t be more important here.

2- Overvalued

Following on from point 1, too many property bulls, coupled with rising debt levels around the world, zero interest rates and central bank QE, has lead to sky high valuations in many markets around the world. In many cases, now is a selling opportunity, not a buying opportunity.

3 – Long-term performance

It is a misconceptions amongst property bugs that real estate has out formed other asset classes. In fact in the long-term, equity markets have outperformed real estate. The S&P and Dow Jones have both comfortable outperformed real estate.

4 – Property’s long-term performance is less certain than equities

The reasons why property have gone up in the last fifty years, including rising incomes and population, low interest rates, and women joining the workforce, might change or are one time boasts. For instance, unless it becomes a norm for 3-4 friends to have a mortgage together, which seems unlikely, women coming into the workforce and hence giving couples more spending power was a one-time boast to the mortgage and real estate industry. World population is also rising less quickly than before, and might stagnant after 2050, once growth rates are decreasing, with interest rates due to rise in many markets.

In comparison, the logic in buying stocks is the same as before. The 100 most productive and successful companies in the US, will, almost for sure, gradually become more productive and profitable as time goes by, with new technology and the survival of the fittest.

5 – Costly

Investing in stocks can often cost 1% or less per year, depending on the product. With real estate, often property insurance is compulsory or at least recommended, whilst bills, including local government taxes, need to be paid. Maintenance is another cost people don’t think about, as is rent-free periods where you will need to cover the mortgage payments yourself.  If you add up the initial commission from the broker or agent and all these hidden costs, that decreased overall returns.

6 – High barrier of entry

Stocks can be bought for hundreds of dollars, and regular savings plans can sometimes be had for $50 per month for low cos, whereas even in some of the cheapest cities in the world for real estate, $50,000-$150,000 is often needed. If you don’t have the money, you need a mortgage, which means more debt payments, and therefore more indirect costs. Once most mortgage holders account for inflation and take away all the aforementioned costs, they might find they haven’t made as much from property as they originally believed.

7 – Makes relocating more difficult

In the end, your salary and/or your profits are one of the biggest, if not the biggest, influence on your wealth. The more you earn, the more you can save and invest. If you don’t want to accept a new lucrative opportunity in another country or city, and one of the reasons is that you don’t want to leave your dream house or you can’t sell it, you are indirectly losing big time.

8 – Illiquid investment

Further to the last point about not being able to sell your property, property isn’t like liquid cash, funds or stocks. With cash, you can, in 99% of occasions, take it out of your bank straight away. With funds and stocks, you can, in 99% of occasions, sell straight away and need to wait a few days to get the money back. With property, it can take months to sell, sometimes years, if there is political instability in the country, or you have bought a house which is near a mobile phone operation that is linked to cancer like my father once did…….

9 – Tax implications

A property, as an illiquid asset, cannot be easily moved abroad, unless you invest in a trust, which has its own implications. Therefore, if you become an expat but want to rent out your house to have more money, you are earning an income from your home country and your new country of residency. As a general rule, this is tax inefficient and in some circumstances, might be double taxed. In fact if you continue to earn significant amounts of money in your home country, your home country’s tax authorities might look into whether your overseas income should be taxed or not, as you haven’t cut your ties that much.

10 – It is inconvenient.

A lot of people invest in property because they think it is easy money. It is actually much more hard work as you are dealing with people. If you invest into quality funds every month, you can sit back, and realize that as markets go up and down, over the long haul, you can make money. If you have 3-4 houses and need rental income, you need to find tenants, and as tenants are people, eventually you are going to have big problems sooner or later. It could be non-payments, or thrashing the place or any number of things.  Furthermore, as time is money, such inconvenience only adds more indirect costs to the process.

Adam Fayed – International AMG – [email protected]

`Guaranteed Returns` in mutual funds

During my time working overseas advising expats, many funds promising guaranteed returns, often with excellent track records, have collapsed. LM, an investment which was based in Australian, collapsed last year. The fund, which was regulated in one of the most regulated financial centers in the world, had a great track record and was based on investing in real estate, has left many investors completely out of pocket. Recent funds being sold onshore and offshore, such as UK student accommodation funds, are also in liquidation.

I am not saying that all structured notes and leveraged and illiquid assets are bad. Having one home to live in, which isn’t mortgaged, is good for people in many situations; and some liquid funds and structured notes have performed well and returned investors a good return.

However, readers should consider one thing. If structured lending to developers and other industries such as farming, was so profitable, with so little risk, then why are private equity firms and other people in the know not looking to buy into such opportunities? Why do such products need to be retailed, and sold hard, to consumers, if they are such great opportunities?

The world’s top markets have had more than 100 years of consistent gains over long periods of time. Somebody who invests monthly into the markets, moreover, does not need to worry about short-term trends, as buying cheap, can allow for higher returns, as dollar-cost averaging shows.

One of the positives of equity investing, which isn’t always stated, is that it is a more liquid investment, and a buyer and seller can be found. Next time you are pitched by your adviser/stockbroker, a good question to ask is `is this fund liquid` or `does the fund allow daily trading`.

If you insist on buying into illiquid funds and bonds, at least go through some of the more sound financial institutions. Ultimately funds guaranteed by Goldman Sachs or any of the other big players, have a much better chance of honoring their guarantees than some boutique fund.

Do you want to become financially free?

Some people love their jobs and some people hate their jobs.  We all agree on one thing.  Everybody would answer yes to the following question “would you want to have the freedom to retire or semi-retire as soon as possible if your health becomes poor or you started to hate your job or business".

Getting there is easier said than done.  There are a lot of financial lies out there.  Lies about property outperformance and consumption habits of the wealthy.  98% of industries try to persuade us that consumption will equal more happiness.  Some aren’t subtle about it.  L’oreal and their slogan certainly isn’t subtle. Others are more indirect.  All can do damage to people’s finances.

I used to be pretty bad with money myself.  Some of my close family members can’t retire, when they want to, due to making some basic mistakes throughout their lives.

Is it possible to be financial free now, and have the money to travel the world and live the lifestyle you want?  For some people, probably at least 10% of people, the answer is probably yes.  They just need to rejig their financial situation to produce more income.

For many others, they can become free in 5-15 years (and certainly quicker than they expect to), if they follow four simple principles:

1).  Saving and investing more.  No speculation or trying to time markets.

2).  Having a diversified global portfolio, with good asset allocation

3).  Keeping costs down

4).  Once accumulation phase has occurred, not withdrawing more than 4% of your account value.

The four steps above sound simple.  But whilst some people can do the above alone, the academic evidence suggests DIY investors underperform.  Human nature is the killer. Greed, fear and egoism reduce returns.  Some guidance is needed.

If you want to speak about setting up a structured that will make you more financially free contact me at my email address –  [email protected]  I help set up structures for individuals living around the world, that helps people achieve financial freedom.