As we already saw in "Real Estate vs. Stock Investments" and "Bonds vs. Stocks," 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. 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 in the long term. In the short term, any asset can outperform any asset. Back in the day, in the Netherlands, the price of tulips skyrocketed for years until it reached values greater than apartments in Amsterdam (Tulip mania). This fact provides no evidence that tulips, by themselves, are a great investment.
Graph 1. Long Term Returns Per Investment Asset Class in the US (Siegel, 1994)
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”. Therefore, at Moraya Consulting we encourage the use of different currencies to buy assets abroad. For example, if you not live in the US, use dollar to buy US bond ETFs. If you are planning a trip to Europe, use euros to buy euro-denominated bonds.
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.
"The feeling that people are caught on something they really don't understand is overwhelming." - Paul Krugman on Bitcoin, Professor at the London School of Economics, The 2008 Nobel Prize Winner
"Bitcoin is a speculative bubble. That doesn't mean it will go to 0." - Robert Shiller, Former Professor at the University of Minnesota, The 2013 Nobel Prize Winner
"When you buy a farm [...] you look to the asset itself and what it produces. When we buy a business [...] we not only have what we bought but we have something that the asset produces [like the farm]. When you buy a non productive asset [like bitcoin or gold] all you are counting on is weather the next people is going to pay you more" - Warren Buffett
"[Bitcoin] is not producing anything, so you shouldn't expect it to go up." - Bill Gates
"Bitcoin reminds me of [...] the pursuit of the uneatable by the unspeakable." - Charlie Munger, Billionaire Investor
"Gold is not an investment AT ALL. [...] It has no underlying intrinsic value [...] so gold is a speculation" - John Bogle, billionaire investor and founder of one of the world's largest investment firms (Vanguard)
"One dollar of gold bullion purchased in 1802 was worth $11.17 at the end of 1997. That is actually less than the change in the overall price level! In the long run, gold offers investors some protection against inflation, but little else. Whatever hedging property precious metals possess, these assets will exert a considerable drag on the return of a long-term investor's portfolio." - Jeremy Siegel, Professor at the Wharton School at the University of Pennsylvania
- 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.
- Siegel, Jeremy (1994). Stocks for the long run: the definitive guide to financial market returns and long-term investment strategies. New York: McGraw-Hill.
- 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.