This article will answer five questions:
- How can you invest in stocks in Taiwan?
- More importantly, should you invest in stocks as an expat living in Taiwan, local Taiwanese or international investor?
- On the broader question of emerging markets (even though Taiwan is a developed and high-income country it is considered an emerging market from an equity market point of view and is one of the biggest components in MSCI Emerging Markets) is it a good idea to invest in this area?
- Is investing in stocks in Mainland China from Taiwan a better alternative?
- What’s the best thing to do/bottom line/conclusion?
I will use my answers from the social media website Quora.com, where I am the most read investment and personal finance writer with over 218 million answer views, to make my point clear.
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Often times, local brokers will close down your account if you move from country to country.
This makes it imperative for expats, and Taiwanese people living abroad or who plan to move overseas, to invest in portable solutions.
How can I trade on the Taiwan stock exchange?
There are two questions to answer here:
- How to trade on the Taiwan stock exchange
- Should you trade on the Taiwan stock exchange as a local or expat?
For the first question, there are loads of investment platforms online, some of which are available through advisors and others which are DIY, which give you access to:
- Taiwan-related ETFs and funds
- Some emerging market funds, and `Great China funds`, are linked to HK, Mainland China, Taiwan and some Chinese focused companies in the region.
- MSCI Emerging markets has a reasonable allocated to Taiwan because the index was constructed during a period when markets like South Korea and Taiwan were emerging markets.
The second question is should you trade on the Taiwan stock exchange as an expat living in Taiwan (I will deal with locals later)?
I would say the answer is usually no for the following reasons:
- Unless you actually live in Taiwan, you don’t need to get access to Taiwan directly. You can get access indirectly through the aforementioned funds. If you live in Taiwan as an expat, however, you can make an argument that in order to limit currency risks, one should at least have a reasonable allocation to the local stock market. This is especially the case if you plan to retire in Taiwan.
- The Taiwanese stock market, just like many others, has its good and bad periods. Over a long period of time, however, it is highly unlikely to beat the US S&P500.
- It is much less diversified than MSCI World, which is a worldwide index as per the information below, or the S&P500. Even though the S&P500 is a US index, it is worldwide, as most US firms sell globally, and plenty of international firms list on the US stock exchanges.
- Every dog has its day. So, it is true that the Taiwanese stock market will have its periods of over-performance. 2020 was such a period. Taiwanese stocks did better than most other countries. Yet we can’t know in advance which countries’ stock exchanges will outperform. The reason is simple – there are too many unknown variables. There is little or no correlation between economic growth, wars, inflation and many other events and stock market performance. Just look at 2020. US markets had another good year. They were up by 17% on average, with the Nasdaq outperforming at 43%. Yet the US had awful death rates, a recession and a disputed election. One of the best period for stock markets was during early November – when there was a second lockdown in Europe and a disputed US election!
- Following on from the last point, I have never met a person who has managed to time markets. In other words, find a time to buy Taiwan stocks and ETFs at the right time, then buy US indexes, sell them and buy Taiwan again.
For all of those reasons, the best risk-adjusted strategy as an international investor or expat is often to invest in a diversified portfolio, like the aforementioned MSCI World, together with some other investments.
Even for a local Taiwanese person living in Taiwan, it is important to be internationally diversified, especially if you plan to live overseas in the future.
So, is the Taiwanese stock market better to own than the Mainland Chinese ones like Shenzhen and Shanghai?
Yes, but it isn’t as good as owning a worldwide index or the S&P500.
How can you save for retirement in Taiwan?
As a foreign in Taiwan, realistically you shouldn’t rely on the local provisions. This doesn’t just apply for Taiwan.
It also applies to expats living in China, Japan and most countries in Asia-Pacific. Most foreigners aren’t going to retire in Taiwan, so having an International solution, makes more sense.
Even for local Taiwanese, just focusing on local real estate and stocks is high risk, compared to diversifying to include international assets.
So if I lived in Taiwan, I would just continue to invest into my expat investment account.
Is it risky to move from broad geographical diversification into investing mostly in less developed markets?
- Emerging markets have more small retail investors and less institutional ones
- The average performance of MSCI Emerging Markets hasn’t been stronger than the S&P and developed world markets
- Now sure, there are some years where emerging markets produce much more, like this example below;
- However, the overall trend is that higher GDP growth doesn’t always translate into better market performance
That last point is the key. If you were accepting more volatility for higher returns, then great.
Why care about some awful years of -40% growth if the overall trend, over 30 years, is likely to be much better than the S&P and other developed markets?
The reality is different though.
Should I buy Chinese stocks now that the Coronavirus is causing prices to decrease?
I would avoid China-specific ETFs and stocks because of:
- Corporate governance issues
- Political and social risks
- You can get direct and indirect exposure to China through US and international markets. Look at Alibaba and countless other Chinese IPOs on US markets:
- Many big US firms like Apple and Amazon, and for that matter European companies, have revenue coming from China. For example, about 25% of Apple’s revenue comes from China
- The Chinese index is much riskier than a broad based index like MSCI World
- Individual Chinese firms are even more risky than a Chinese ETF and much riskier than a broad based index
- China has deep economic problems that are seldom mentioned in the media, including Western media. For example, its growth is probably not 100% accurate. Most real estimates suggest China is only growing by 3% per year and not the 6%+ the CCP is suggesting
- Growth and stock markets aren’t always connected, but this brings us back to the corporate governance issue.
So yes I would be adding positions right now, but I would avoid a China-specific position.
Many people have made that mistake in the last few years. They have seen the Chinese market struggle since 2006, and have been waiting for it to move upwards.
It will one day but markets are stupid, even if they aren’t efficient all the time.
They are pricing in China’s risks to the equation.
Is this the right time to buy stock in China?
On paper, Chinese stocks have looked quite cheap for years, apart from a brief moment in 2015, when they charged ahead, before falling.
The issue is, the market has been in trouble since 2006. In a market dominated by small retail investors, in comparison to the S&P which is dominated by institutional investors, sentiment seems to change easily.
In other words, as the market is reliant on individual investors, and most of those individual investors have been scarred off by previous falls, there is no guarantee that the market will increase.
‘Country picking` emerging market ETFs is high-risk. I would just have a 10% allocation to an emerging market ETFs.
Indirectly, it will have about a 20% allocation to China. Added to the allocation through MSCI World that should be enough.
What’s the bottom line?
If you plan to live in Taiwan forever, as a local or expat, there are some solid arguments for investing a part of your portfolio in the local stock market.
It will lower your currency risks for one. It still pays to be diversified though, especially as the Taiwanese stock market index is unlikely to beat the S&P500 long-term.
If you are living outside of Taiwan, or just temporarily in the country, it is better to focus on building a portable, internationally-diversified, investment account.
In the answers below I was asked:
- What does a beginner need to know in terms of investing in the stock market? More importantly perhaps, what things are often neglected by people new to investing.
- Is it possible to support yourself financially from a stock market investment portfolio? In other words, can you eventually stop working due to your stock investments? What do people get wrong when they think about “passive income”?
- If you want to become a millionaire investing in stocks, how much do you need to invest every month or year? Is it less or more than you might expect?
As a preview I have copied part of the answer below
The basics in any domain is key. If you want to get fit, the basics of good nutrition, exercise and posture is important.
The same is true in investing. It is a myth that you need to be very intelligent to be a good investor as the quote below says:
What people need is
1.Actually get started – 80% of success is just showing up. The same in investing. Just setting up that investing account sounds obvious, but it is key. Beyond that, simple tricks like investing one day after you are paid can increase how much you invest dramatically. Some studies have even shown that people are able to invest 3x more by investing at the start of the month, as opposed to at the end. Over time, how much you invest and for how long, will be even more important than compounded returns.
2.Time and patience – The easiest way to make money, with less risk, is to leverage time. Stocks are risky if you only hold them for a year. Even some of the bets ETFs and indexes are. If you hold them for decades, they aren’t. Don’t confuse volatility and risk.
3. Be diversified. If you hold stocks and bonds together, it is even safer:
4.Basic knowledge at the very least – Or outsource the process to somebody that does have that knowledge. Plenty of people make the mistake of investing without knowing that much about it.
5. Nobody can predict the future – Now sure, countless people can get one prediction right. Some can even get many right. Plenty have an excellent run at predicting things. Over a 40–50 year period, however, it is very unlikely that you will beat the market by making moves based on listening to the talking heads on the media. Countless academic studies have shown that people can’t beat the market by listening to CNBC, Bloomberg and many other media outlets. At least on a long-term basis.
6. Emotional control – This is the most undervalued point. Most people think that the bets investors are the most knowledgeable ones. Yet a very emotional and super knowledgable person doesn’t do well in investing. Every time there is a crash, they panic sell. Even some PHDs in portfolio theory have been found to have broken their own rules in investing.
With the last point, what’s more important is nobody knows how they will react to a stock market crash until they experience one.
Back in early 2020, the stock market hadn’t really crashed in a big way since 2008.
I personally know so many people who “pledged” to me that they would never panic sell like those “idiots” (to use their words) in 2008.
Then 2020 came along, the media screamed this time is different like they always do, and many of those people panic sold.
Another part of emotional control is not getting too excited during the good times or too depressed during the bad times.
Most people look at a stagnant stock market and think it isn’t worth investing in.
Few people wanted to invest in the S&P500 in 1982 after 17 years of stagnation.
Likewise, few wanted to invest in it in 2010 after a “lost decade” . Yet after both periods, stocks went on long bull runs from 1982–2000 and 2009–2020.
Likewise, people shouldn’t be put off by the fact that some markets like the FTSE All Stars has underperformed the US markets in recent times.
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