Cultures are responsible for so many differences in virtually all parts of our lives. As a random example, did you know that in Japan slurping noodles is considered a sign of appreciation, not rudeness? Therefore, it shouldn’t surprise us that our cultures also impact our perspectives and strategies regarding investing, which can change dramatically as a result of cultural, economic and historical factors. I thought it might be enlightening to highlight some differences between the Israeli attitude to investing, versus that of the Americans, Canadians and British in order to recognize our own biases and adjust accordingly.
Portfolio Allocation
Israel: Interestingly enough, Israeli investors tend to be more conservative, favoring bonds and cash over stocks. Figures from the end of 2023 show that a significant portion of Israeli financial portfolios consisted of bonds (including government bonds) and deposits, with equities (otherwise known as stocks) playing a smaller role.
Anglo countries: Americans are generally more willing to take on risk, with higher allocations to equities in their portfolios. They have a higher rate of direct stock market participation, followed by Canadians and the British who prefer to invest via pension or mutual funds, rather than direct stock ownership. The U.S. stock market culture, driven by large capital markets and individual retirement accounts (e.g., 401(k)s), encourages equity ownership and other higher risk assets like cryptocurrencies, as a means of creating long term wealth.
Real Estate Preferences
Israel: It should come as no surprise that real estate investments occupy a significant portion of Israeli wealth. This reflects the cultural and economic preference for tangible, stable assets, especially in uncertain geopolitical times. Home-ownership is a strong cultural value in Israel, and real estate investments, mostly in residential apartments and homes, are seen as a safe and stable long-term growth strategy. Limited land availability and high demand have driven property prices up significantly, making real estate not only a cultural aspiration but also a profitable investment vehicle. Israelis prioritize home-ownership, often as a generational goal. Beyond home ownership, familiarity with real estate ownership and tax advantaged rental properties often means that the only investment considered by Israelis is real estate.
Anglo countries: U.S. investors normally see real estate as just one component of a diversified portfolio, important but often secondary to investments in equities and equity mutual funds in middle-class portfolios. Americans also invest in REITs (Real Estate Investment Trusts) for exposure to real estate without direct ownership and are more open to renting due to mobility and lifestyle preferences. However, housing represents a larger portion of Canadian and British household wealth than for the average American.
Risk Tolerance
Israel: Israelis generally exhibit lower risk tolerance, possibly as a result of historical economic instability (like the hyperinflation of the 1980’s) and ongoing geopolitical uncertainty. Also, government savings programs and pension fund default options encourage more conservative investment habits. In general, the older generations especially prefer cash and fixed-income investments. I might also speculate that general ignorance of the outperformance of long-term equity returns as compared to bond, leads investors to be too conservative with their stock exposures.
Anglo countries: Americans generally have a higher risk tolerance, which is reflected in greater equity exposure and an interest in high-risk assets like tech stocks and cryptocurrencies. This can probably be attributed to their robust and diversified economy and a long history of stock market growth. I remember many examples where I encountered a new American investor telling me that his portfolio is balanced and then to discover that meant only 80 or 90% exposure to stocks. Canadians tend to be more conservative, often favoring fixed-income investments like bonds, GICs, and dividend-paying stocks. The British are typically even more risk-averse than Canadians, prioritizing income-generating investments, such as rental properties and dividend stocks.
Stock Market Participation
Israel: Many Israelis rely on institutional investors, such as pension funds, and keren hishtalmut saving plans to handle their equity exposure, which tends to be under-exposed to stocks. Active stock picking is relatively rare, although index investing is gaining traction.
Anglo countries: The culture of individual stock ownership is deeply rooted in the U.S., driven by tools like IRAs, 401(k)s, and widely available and inexpensive online brokerage platforms. Index investing is highly popular, with ETFs like the S&P 500 index fund forming a major part of many portfolios.
Impact of Pension Systems
Israel: The pension system in Israel is heavily regulated, with mandatory contributions from both employees and employers. These funds are primarily invested in low-risk assets, such as bonds, ensuring long-term stability but limiting exposure to higher-yield equities. Government guaranteed bonds held in the pension system provide greater security and incentivize managers to limit risk exposure, especially in the standard investment track or maslul clali.
Anglos: Americans have more control over their retirement savings through 401(k) plans and IRAs. This flexibility encourages individuals to take on more equity exposure, with many relying on stock market growth to secure their retirement. Canadians, once again, are generally more conservative than Americans, favoring bonds and GICs (Guaranteed Investment Certificates) for retirement. The UK has a modest state pension system. Additionally workplace pensions (auto-enrollment) and private ISAs are widely used. The British often allocate a higher portion of savings to cash compared to Americans or Canadians.
Conclusion
Most people reading this article are either ex-pats, or exposed to investments in Israel as well as their home country. It’s therefore helpful to contrast the trends within Israel and the Anglo countries to better understand our own biases. Americans tend to be the most aggressive investors, prioritizing growth through stocks and higher-risk assets. Israelis, Canadians and the British, by contrast, are more conservative, focusing on income-generating investments and real estate.
However, it is worth recognizing the different perspectives, so that your investment strategy matches your goals, rather than your culture. Exposure to stocks versus bonds should also be a product of risk and reward comparisons. With stocks reaching new highs, especially in the USA markets where valuations are expensive historically, and bonds providing decent short to medium term returns, you need to carefully consider your personal preference and how it fits into your long-term plan.
With continued prayers for the safe return of all of our hostages, the safety of our soldiers in all their missions, and the security of our nation.