Many people who set out on their investment journey look towards the United States for inspiration. The appeal is luring. After all, the bulk of the information available — from blogs to forums to YouTube channels and even the leading fund management companies — originate in the US.
However, we notice that when it comes to non-Americans, beginner investors try to copy advice geared towards Americans. For these people, doing so creates hidden risks and reduces returns.
Here are some common pitfalls we see.
(note that this advice is geared towards a non-US audience — although you probably got that. If you’re an American abroad, the rules are a bit different. We’ll cover that soon!)
It’s (definitely) not all bad.
We should start by saying that we applaud anyone looking to invest in their future. Not enough people do it, and that’s a pity.
So if you’ve been researching investing, pat yourself on the back.
(Seriously. Good job!).
Let’s go over some investing concepts that originated in the United States.
The invention of passive index investing
Once upon a time, investors believed that the only way to profit from the stock market was by actively trying to beat it. To get there, they would pay an ‘expert’ a lot of money to pick the ‘winners,’ usually with limited success.
Starting in the 1960s, some economists began exploring the concept of passive investing. Instead of trying to beat the market, they argued, investors should broadly diversify their portfolio and focus on the long-term. In exchange, they would profit more than active investors while avoiding numerous risks.
By the 1970s, finance pioneer John Bogle came out with the first index fund, the Vanguard500. It bought a basket of shares in the 500 largest American public companies. While slow to take off, passive index investing is now tremendously popular.
Today, passive index investing is the undisputed first recommendation for individuals looking to grow their wealth. Regardless of where you are in the world, the American-born concept of passive index investing will most likely benefit you as an investor.
Bogle’s Vanguard company is one of the world’s leading investment fund providers. Although he passed away recently, his wisdom is still alive and kicking (note, please do not act solely on what you read in this link).
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A healthy relationship with wealth building and money
For many people, America’s model is a benchmark for financial success. The country views richness as a noble aspiration, and its laws and regulations reflect that.
Virtually all working Americans can save for their golden years in specialized retirement accounts. These accounts, like an IRA or 401(k), let workers avoid taxes to grow their wealth faster.
The “sky’s the limit” mentality encourages wealth generation and rewards risk. It’s no wonder why so many startups and entrepreneurs the world-over flock there.
Put together, passive investing and having a positive relationship with money are great lessons for anyone looking to achieve financial success.
So, where’s the problem?
You’re not American
(so don’t make investments like one).
In our interactions with people, we’ve noticed that many people take the US model literally.
While embracing the US spirit towards personal wealth is beneficial, the lessons do not translate verbatim.
As we expats know, the subtleties make differences between cultures and languages (“Same. Same. But different,” as the Southeast Asian saying goes). The same axiom holds true in investing.
Here are two of the biggest mistakes we see.
The index and currency folly
Earlier, we talked about the immensely popular Mr. Bogle and Vanguard.
His leading investment advice to diversify globally. To do so, he says to use a handful of index funds or ETFs that invest in over 6,000 stocks spread around the world. This isn’t bad advice: portfolio diversity helps minimize certain risks.
For the non-US audience, there’s a catch.
We’ve seen forums and websites advocating European investors to copy this strategy directly, using a two-fund cocktail to replicate a single American one.
Unfortunately, the funds these armchair advisers promote work in US dollars, not euros, pounds, or any other European currency.
Unless their goal is “retirement in Florida,” these folks probably don’t want a big pile of greenbacks when they’re done investing.
Compounding the problem is that while American investors benefit from many parts of the world defacto operating US dollars, non-American ones do not.
This disconnect adds more risk from currency fluctuations, while potentially decreasing overall returns.
Round peg, square hole
Likewise, American-based advice revolves around the unique tax and regulatory structures.
Some of these tactics involve taking advantage of the US system, which doesn’t translate externally.
The risks here aren’t always immediately apparent. Tax reporting takes place throughout the strategy. Likewise, rebalancing a US-style portfolio — to keep it on target — can become expensive as the chance of reporting becomes more complicated.
What is apparent is that US tax laws and regulations do not apply to investors outside the United States. Working within that framework makes no sense.
What to do
If you’re not an American investor, there are a couple of things you can do to avoid these pitfalls.
First, don’t blindly copy an investment strategy meant for Americans. These plans leverage the US system to benefit local investors, which, conversely, creates new, preventable risks for non-Americans.
Second, think about your long term goals, where you’ll be when you reach them, and the constraints of the system you’re working in. Doing so will allow you to build a better strategy that takes full advantage of the power of passive investing. Equally, you’ll avoid nasty tax surprises, costly adjustments, and needless losses.
Finally, don’t take the information found on forums as legitimate investment advice! You can read a million different threads or binge-watch ‘bro finance’ YouTube for hours on end. Still, you’ll wind up with an incomplete, generic strategy.
There’s a lot more to a sound investment strategy than photocopying the Americans. A financial professional should be able to help you see the big picture and help you paint it in the colors best suited for your canvas.
And while the United States might inspire your investment masterpiece, the successful financial artists create what’s unique for them. We recommend you do the same.
We at abroaden are helping people abroad around the world find the best way to invest and manage their money regardless of where they are on the globe.
Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.
Note that this article is for information and educational purposes only. It does not constitute financial advice.