After a difficult year, many expats are looking to the future with enthusiasm and hope. For many, this means reviewing finances in a bid to finally reach those long-awaited goals. After such a turbulent year, it may feel as though it is the ideal time for investing in the future, but unfortunately there is never a perfect investment opportunity so it’s important to be prepared.
To help you on your way to reaching your goals, we’ve put together a guide to some of the factors you should consider and pitfalls you should avoid when approaching investments in 2021.
1. Failing to create a clear investment plan
Every investor should have a plan, but as an expat it’s important that you really consider your financial future before making investments in 2021. Begin by considering your investment goals; you should think about where you hope to be in the short-term, mid-term and long-term when it comes to money. Investing everything in the hope of seeing quick returns may feel tempting, but if you have mid-term plans to purchase property abroad or long-term overseas retirement plans, you should ensure these are also taken into account.
Experts suggest that you should balance low, medium and high-risk investments with your plans, ensuring you have the right combination in your portfolio to reflect your personal goals. For example, if retiring abroad in 10 years is your only priority, you may wish to consider more low and medium-risk investments. In contrast, expats looking to boost their deposit for an overseas property may juggle medium and high-risk investments in the hope of securing greater growth in the short term.
2. Choosing investments based on past returns
It is easy to be drawn into the trap of planning your future investments based on your successes in the past. But capitalising on your investment victories shouldn’t mean restricting yourself to the same strategy time and time again. In fact, by limiting your portfolio you could be missing out on a number of opportunities, particularly given the turbulent economic environment. The impact of Brexit and, perhaps even more significantly, the COVID-19 pandemic has been huge and far-reaching, affecting markets across the world and resulting in dramatic shifts in the world of investments. Looking forward is the best approach to ensuring you are using your money as effectively as possible.
As above, you will need to create a detailed and personalised investment plan that takes into account your current finances. However, this plan should also centre around investments that will take advantage of fluctuations in the markets rather than rely on previous investment strategies that are likely to be significantly outdated. Whether you wish to select your investments by yourself or use the advice of an independent advisor, choose companies that you believe will provide long-term returns and are unlikely to be affected by the repercussions of recent global events.
3. Skipping the research stage
We hope all of the information above will have already encouraged you to put a little more time into researching your investments in 2021, so this next potential pitfall may not come as much of a surprise to you. Nevertheless, it’s important to consider how crucial the research phase of investing can really be. It’s very easy to take investment tips from friends and family, or to take advantage of what feels like a steady and reliable opportunity such as a major global brand. Expats are particularly well-placed to fall into such traps as it’s easy to be tempted into investing in unknown brands on the back of local knowledge.
However, if you do not take the time to dig deeper into your investment choices before taking the plunge you could be taking a greater risk than you realise. To prevent yourself from making these mistakes, take the time to understand the different types of investment available to you. There are many different options available, including:
- Mutual funds
- P2P Lending
- Real estate
Once you have identified one or more types of investments that suit your financial plan, research individual opportunities to identify the risks worth taking. Remember — consider current and predicted future performance rather than focusing solely on historical returns and star ratings.
4. Failing to diversify
Diversification is a good tool in both finance and business, helping to reduce risk. While some people avoid diversification in favour of greater investment, this inevitably increases the risk to that investment. As we have outlined above, there are many different types of asset classes available to investors. While all individual investment options have unique risks, each of the above asset classes offers its own types of risk that can result in huge losses for investors who fail to diversify and who only bank on a single class.
For example, there have been a number of investment classes that have suffered significant blows across the board as a result of the COVID-19 pandemic. For investors who have put all their eggs in one basket, this has resulted in a stressful year as they attempt to rebuild their portfolio. Experts suggest that the best way to avoid this stress is to invest in a wide range of classes — at least five — that offer different types of risk and reward. By spreading your investments in 2021, you could prevent yourself from suffering significant losses in the future should we face any more economic uncertainty.
5. Investing based on emotions
It’s easy to become emotionally invested in your finances, particularly when the world has faced such an uncertain period. Giving in to fear, greed or even sentimentality can lead to making poor investment decisions. Many people, for example, will struggle to move on after experiencing success with one company. Whether they are fearful, hopeful of continued growth or purely emotionally attached, this behaviour can result in poor financial decisions and investment losses. It is important to continually research and review your investments to ensure you are always using your money wisely, rather than simply sitting comfortably.
In a similar vein, traditional investments such as gold and real estate are often considered a strong, long-term investment choice. However, by giving in to fear and failing to branch out, you could find yourself suffering as a result of slowing growth rates. For example, due to the pandemic there are now many businesses moving to a work-from-home model. This has resulted in a number of commercial properties suffering, along with their investors. Similarly, gold is starting to suffer significantly as a result of cryptocurrencies such as Bitcoin. In order to benefit from larger growth margins in the years to come, it’s important to take a step back from traditional, comfortable investments and embrace new opportunities.
At ExpatRoute we work hard to provide expats with the information they need to create and maintain a successful life abroad. However, if you are thinking of investing your money, we suggest approaching an independent financial advisor who can help you build an investment portfolio that works with your expat goals.