As we already saw in "Real Estate vs. Stock Investments", equities far outperform all other major asset classes in the long run. In the last 100 years, stocks gave annual returns of about 7% a year for investors, while bonds gave 2.5%, and bills 0.98% (Jordan et al., 2017). Moreover, as Warren Buffett said in 2018, “if you had bought gold in 1942 […] you would have less than a penny for every dollar you got from owning stocks.” Why does that happen? To understand that it is vital what “money” represents.
Money is a representation of wealth. Governments cannot print one billion for each citizen and make everyone a billionaire. That is not how it works because the act of printing money generates no wealth for society. By printing one billion for each person governments would just elevate the price of goods in a society, i.e. inflation. Companies, on the other hand, constantly generate wealth. For example, a furniture company takes pieces of wood and creates chairs and tables. Chairs and tables are more important for society than pieces of wood, so it generates wealth. Stocks are no more than pieces of companies. Fiat currencies (e.g. bills, cash), cryptocurrencies (e.g. Bitcoins), commodities (e.g. gold-silver) do not produce anything for society themselves. That is the basic reason why stocks tend to give far better economic returns than any of these other asset classes.
How to Use Currencies to Invest Better
In summary, currencies, in general, are bad long-term investments by themselves. They do not generate any wealth, so they tend to give less economic returns than wealth-producing assets, like equities. However, you almost always need some kind of currency to buy stocks and different currencies can diversify an investment portfolio and protect against local currency devaluation as we saw in “Investments Denominated in Foreign Currencies”. Such diversification can increase your risks and increase your returns, simultaneously ("Investing Abroad"). Therefore, at Moraya Consulting we encourage the use of different currencies to buy assets, like stocks or bonds abroad. For example, if you are Latin American, use euro to buy Eurozone stocks and bonds. If you are European, use the dollar to buy US assets. If you are American, use pounds to buy British investments.
We do not encourage the use of the currency itself as an investment. For example, buying Bitcoin and leaving it in some account waiting for its value to go up. However, we have no problem with Bitcoin if you use the cryptocurrency to buy other assets, like stocks and bonds. We even encourage it, if you can find ways to buy and sell cryptocurrencies with little or no exchange fees and given that buying cryptocurrencies is legal in your jurisdiction. Some brokerages do accept Bitcoins and other cryptocurrencies as a mean of exchange. In this article, I define cryptocurrency as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Therefore, currencies like the Venezuelan Petro are not considered cryptocurrencies here.
Crypto Currencies and Freedom
Moreover, from a libertarian perspective, there is something to be said about the benefits of cryptocurrencies for societies. As a Nobel laureate and one of the most influential economists of all time, Friedrich Hayek once said:
“Money hasn’t been improved. Money has rather become worse over the course of time. And what we have had since in development, matters of government inventions, mostly wrong, mostly abuses of money. And I have come to the position of asking, has monetary policy ever done any good? I don’t think it has. I think it has done only harm. That’s why I’m now pleading for what I’ve called Denationalisation of Money.”
Hayek said that decades before the creation of cryptocurrencies. In support of his claim, there are plenty of cases that governments have done more bad than good for societies, especially in poor countries. In one of the most important political science books of all time, Robert Bates indicates that the main reason holding Africa develop is their politicians who continue to intervene in the economy for their good at the cost of the population. In Latin America, many would echo such observations by Bates (1981). In Brazil, 1990, the government decided to freeze bank accounts in the excess of $1000. Many people who needed emergency health care died because they could not withdraw their money from their bank account. Moreover, the hyperinflation that led to the bank freeze was a result of bad government economic policy that tried to industrialize the country by closing the local economy to foreign markets (a practice used throughout Latin America, called import substitution industrialization, which led to hyperinflation all over the region in the 80’s). If cryptocurrencies were available and widespread in Brazil in 1990, it could have saved many lives since governments do not have control over them. Today (2019), it can be argued that the citizens of many nations, such as Venezuela and North Korea, would be much better off if Bitcoins were the main means of exchange and their governments had no control over monetary policy.
Bates, Robert (1981). Markets and states in tropical Africa: The political basis of agricultural policies. Berkeley: University of California Press.
Jorda, Oscar, Katharina Knoll, Dmitry Kuvshinov, Mortiz Schularick, and Alan Taylor (2017). The Rate of Return on Everything, 1870–2015. Working Paper Series 2017-25, Federal Reserve Bank of San Francisco.
Warren Buffett (2018) https://www.youtube.com/watch?v=LtITDtZPYEw&t=248s
Friedrich Hayek (1974) https://www.youtube.com/watch?v=9-uo-KfnkhI
IMPORTANT: THERE IS NO ONE BEST TAX OR INVESTMENT STRATEGY. IT ALL DEPENDS ON YOUR GOALS, RESOURCES, AND CITIZENSHIP.
For example, are you willing to move abroad? If so, where? How long do want to stay in each place? What is your annual income? How much money are you willing to invest? Do you want short term gains or long-term investments? What is (are) the source(s) of your income? How much taxes do you pay annually? Do you want to decrease your tax duties or completely remove them? Do you feel like you want to pay some taxes even if you do not need to? What is your citizenship? Do you have multiple citizenships?
Depending on each of these answers the best investment/tax strategy for you will differ. In order to see what option is best for you and to help with the implementation of the strategy feel free to reach out to us.
You do not need to be rich to create a global investment portfolio. Most of the bank and brokerage accounts we open do not have minimum initial deposit or maintenance fee. Thus, you can invest as much as you want or even leave the accounts empty until you have enough capital or interest to invest abroad.