Now that you’re retired (or soon-to-be-retired) and no longer receiving a salary, how do you approach your investment portfolio? Experts have a golden rule when it comes to investing post-retirement: you can’t earn back your retirement funds without a steady income. For this reason, you better make sure you are making wise and safe investment decisions.
When you’re working with an active income, but your investments did not do as well as you had hoped, you still have a margin of adjustment. You could work longer and postpone retirement. Once you have retired, that is no longer an option.
Hence, following events such as the Greek debt crisis, Britain’s ‘Brexit’ and China’s recent market crash (albeit recovering), making investments overseas may seem like a risky endeavour and structuring your investment portfolio 100% locally based sounds like a safe bet.
On the other hand, reports from Khazanah Research Institute and the Employees Provident Fund (EPF) show that the average Malaysian is retiring with insufficient funds. Compiled with other economic factors – such as the falling value of our Ringgit, the rising cost of living, care and medical inflation – you can’t help to wonder if perhaps you should take your chances and diversify your portfolio across countries.
If you’re in the midst of deciding whether to make an investment locally or abroad, here are a couple things to consider first.
Know your investment objectives
Whether to invest locally or abroad, it really depends on your investment objectives. You need to know the reason why you want to invest overseas. Making investments overseas does indeed carry various additional risks such as foreign exchange risk & geo-political risk. Therefore, as an investor, you would expect higher rate of returns to compensate for the risks taken.
However, if your retirement needs are already met or can be satisfied by a purely local portfolio, then making an investment overseas isn’t necessary.
4 Building Blocks to International Investments
There are good reasons to add international exposure to your investment portfolio. By broadening your investment horizon, you can tap on opportunities that are not available in Malaysia such as global conglomerates and high-growth emerging economies. Besides that, investing overseas can also add to the diversification of your portfolio.
But as a retiree (or soon-to-be-retiree), your retirement fund is critical to ensuring your quality of life and ability to live with dignity as you go down the journey of ageing. Hence, your decisions to make investments is especially critical at this stage in life. You need to be cautious and make prudent decisions to ensure it lasts.
If you have considered every angle and decided an international investment is what you need, decide on where you may need the spending. Keep in mind these 4 building blocks when constructing your investment strategy:
1. Understand the Risks
It is crucial to understand the risks involved in investing overseas. In addition to carrying all the general risks inherent to any underlying investments, there are also risks unique to investing overseas that you need to evaluate. Namely:
• Currency risks
• Political, economic & regulatory risk
• Selling time
• Additional costs
• Information risk
• Legal remedies
If you are concerned about any of these risks and need clarification, it is highly recommended that you seek professional financial advice before you invest overseas. Remember, as a retiree or soon-to-be-retiree, the aim is secure your quality of life during retirement. Its’ better to be safe than sorry.
However, once you are aware of the risks and possess the information necessary to navigate them safely, you’ll find the rewards are worth the effort. Despite the risks, foreign investments are a vital part of any well-balanced portfolio. There is plenty of growth and opportunities to be found overseas to not take advantage of.
If you have done your homework and maintain a well-diversified portfolio by investing only a percentage of your total assets in foreign securities, you can take advantage of worldwide growth in today’s global economy without taking on excessive risk.
2. Research the Region & Asset Options
You need to research what kind of assets that you would want to invest in, such as stocks, bonds, properties, REITS and etc. It is especially important to know what are the costs of investing in a particular asset overseas as it may be more expensive compared to the same investment locally.
Make sure you’ve compared the cost and risk to the expected returns to identifying high-quality income.
When you have decided on the assets you will invest in, you should consider which country or region to be exposed to. Understanding the country or region, the trends and socio-political environment is vital before you invest your money. It could make the difference between loss and gain.
3. Determine & Allocate
When you have understood the risks, the options available and the country/region of choice, you need to determine how much funds you have available and allocate the appropriate portion to invest overseas. You also need to determine what is your investment horizon – that is the total length of time which you expect to hold your investment.
However, if you are a retiree who is approaching the late stage of retirement, you will likely need to de-risk your investment portfolio and scale down the foreign exposure.
Another golden rule to follow is if you don’t have enough retirement fund, investing overseas may not be your main concern or priority. Your priority is to boost your retirement fund.
4. Monitor & Review
When you have made your investment, be sure to constantly review and monitor the portfolio. As foreign investments are more sensitive due to its additional risks, you need to ensure that it is well diversified to minimise any extreme risk or external shocks that may occur.
When to Make an Exit
Handling domestic investments can be challenging enough to deal with. Researching and analysing foreign companies puts an additional level of complexity as you have to deal with issues such as variances in legal and accounting standards, as well as obtaining up-to-date information as some foreign companies may not provide investors with the same type of information.
To navigate more securely as you make an international investment, you could outsource the management of the international portion of your portfolio to a professional who is well versed in the country or region of your interest.
The bottom line when it comes to making an investment overseas is to know how much money does your retirement needs costs and how these needs can be fulfilled by your retirement fund. When you have identified the funds you need, determine if you have the required amount to act as a buffer to investing overseas.
If this ‘buffer’ diminishes – that is to fall below the minimum capital that you need for your retirement needs – then you should stop the investment and make an exit, unless you have a good reason to continue.
Source: First published in Smart Investor, May 2017