There is no escape from investing. Even if you leave all your money in your checking account or hide it under your bed you are investing. At the very least, you are betting that your checking account currency will not lose value over time. However, that is a very bad bet. Due to inflation, cash parked in checking accounts or under your bed, on average, lose 2% of its value per year. This happens because the general price of goods and services in an economy increases over time. Therefore, if you do not invest you are pretty much guaranteed to lose wealth overtime. Moreover, currencies can also lose value in relation to other currencies. As is indicated in the “Investments Denominated in Foreign Currencies” section, even major currencies like the euro, dollar, and pound, sometimes devalue more than 30% over short periods of time, significantly diminishing the wealth and purchasing power of individuals with all assets denominated in one single currency.
If everyone is investing even if they think they are not, the better question is: why should I invest well?
Elementary math indicates that a small increase in investment returns leads to a huge difference in financial wealth in longer periods of time. Graph 1 illustrate this with the example of a person who has $10 000 to invest. The colorful lines indicate how these $10 000 in investment would perform given different annual returns from 1% to 10% annual returns. A person who makes 3% a year in investments, on average, will have $13 048 in year 10, while the person who makes 1% a year will have $10 937. That is $2 000 more in “free” money by year 10 for each $10 000 invested. Therefore, a $100 000-investment giving 3% return would lead to about $20 000 more than a 1% investment. 3% a year is not a very feasible return to get. Even bonds of several developed countries can give you returns around 3%/year with relatively low short term risk.
Graph 1. Investments by Financial Return: 30 and 10-year Timeframe
Because investments grow exponentially, longer timeframes will generate even greater differences in wealth even for returns that many would think are relatively similar. In 30 years, the difference in investing $10 000 in a 1% asset, such as land or a savings account in some developed states, would make you “lose” $10 000 in relation to a 3% investment. In the long term, stock returns give about 7% a year, after corrected for inflation. At 7% return, wealth almost doubles every 10 years. Consequently, in 30 years a stock investment of $10 000 leads to more than $70 000 in wealth. That is almost $50 000 more than 3%/year investments for each $10 000 invested. In developed economies, investment “naturally takes on disproportionate importance, because it takes only a small flow of new savings to increase the stock of wealth steadily and substantially” (Piketty, 2014: 49).
A diversified stock portfolio, using low cost index funds or ETFs, which we help to construct here at Moraya Consulting, can give even more than 7% real returns. A 10% growth investment in 10 and 30 years lead to growth of 136% and 1486% respectively. Therefore, $10 000 invested in year 1 would equal $23 579 in year 10 and $158 631 in year 30. In fact, the financial return on investments tend to far outperform the growth of the economy and wages (Piketty, 2014). Although many people believe that hard work is very important for economic success, the relationship between mean child income ranks and parent income ranks is "almost perfectly linear" in countries like the US even after controlling for race, educational level, gender, parents’ marital status, and other factors (Chetty et al., 2014: 2). The truth is that most rich people today are the ones who had investments in the 70s and 80s and not necessarily the ones who worked harder as shown by the London School of Economics professor Thomas Piketty.
Last but not least, higher income classes not only have more capital to invest than the middle-class but they also have better investment portfolios. Although most people believe that diversification is a key part of investments, more than 60% of the middle-class assets are in real estate investments and virtually all their assets are denominated in their local currency (Wolff, 2017). The top 1% invest 5 times more in financial securities and corporate stock, as a percentage of their wealth, and significantly less in real estate. Stock, specifically, is the best asset in terms of financial returns and far outperform real estate investments. Furthermore, there are indications that rich individuals' stock investments have better returns than stocks held by investors with low income (Martin and Yitzhaki, 1982). In summary, higher income investors tend to have investment portfolios far more diversified than the middle class, which is part of the reason they are so wealthy.
"It is a strong [human] instinct to try to get rich fast and I do not know how to do it." — Warren Buffett, For Many He Is The Greatest Investor Of All Time (Third Richest Person In The World As Of 2019)
"The big money is not in the buying and selling, but in the waiting." – Billionaire Investor, Charlie Munger
"To turn $100 into $110 is work. To turn 100 million into $110 million is inevitable." — Billionaire Businessman, Edgar Bronfman
- Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014). Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States. Quarterly Journal of Economics 129(4): 1553-1623.
- Feldstein, Martin, and Shlomo Yitzhaki (1982), "Are High Income Individuals Better Stock Market Investors?" NBER Working Papers 0948.
- Piketty, Thomas (2014). Capital in the twenty-first century. Cambridge Massachusetts: The Belknap Press of Harvard University Press.
- Wolff, Edward N (2017). “Household Wealth Trends in the United States, 1962 to 2016: Has Middle Class Wealth Recovered?” NBER Working Paper No. 24085.
IMPORTANT: THERE IS NO 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.