by Yaakov Ehrenkranz
As a financial advisor, I am often asked what to do with savings and where to invest. The question is a good one and there is no “one size fits all” answer, but in this article – which shouldn’t be taken as specific investment advice – I want to share some general thoughts on the topic.
Stocks and bonds are probably the default initial investment for many savers looking to grow their capital over the long term, and with good reason. It is relatively easy to do, highly liquid, and over the long term, markets have generally gone up. Your actual results will of course depend greatly on many decisions you make: which securities you buy, what fees you pay, and if you make changes. If you make the major, and unfortunately common mistake of “panic-selling” when things get volatile and then buy back in when the markets have recovered, you won’t do as well as the market. These are among the several factors that will contribute to your overall return. If you are a US citizen you need to discuss with your accountant before investing in funds outside of the US as that can have tax implications. (Read our article The ifs, hows and wheres of investing https://labinsky.com/the-ifs-hows-and-wheres-of-investing, or you can google “PFIC” to learn more on your own … )
Stocks and bonds
I think it is worthwhile to know what exactly you are buying when you buy stocks and bonds. With stocks, whether you are buying shares of individual companies or buying a fund – perhaps an exchange traded fund (ETF) or a mutual fund- that buys shares in many companies, ultimately you are buying small pieces of corporations. Over the long term, if the company does well, its shares should also do well, although in the short term prices can be very volatile as the general market goes up and down or the particular company/sector/industry you invest in might be impacted by good or bad news. In addition to the appreciation that will hopefully come over time in the value of the shares, shareholders might receive dividends if the company chooses to distribute some of its profits to its shareholders. Those dividends can be used to buy more shares of the same company (reinvesting dividends) or the money can be taken and used as the shareholders see fit.
Owning bonds is different. When you own a bond, someone – the issuer of the bond – owes you money. It can be a company or a government. You don’t own part of the entity that issued the bonds, but you hold an IOU- they owe you the principal (which you usually get when the bond matures) with a specific interest rate (which you usually get throughout the period you own the bond. How often you get the interest payment and how much it is depends on the particular bond you own. The amount of principal you receive at maturity does not depend on the success of the company – even if the company does very well the principal will not increase. Of course, if the company defaults or goes bankrupt, then you can/will lose money, but you are generally not entitled to share in the issuer’s successes more than the interest payment they agreed to pay when the bond was issued. Bonds can be purchased individually or as part of a fund, just like stocks. Until it matures, though, the value of the bond will fluctuate based on changes in interest rates and based on how well the issuer is doing, among other factors.
When starting to invest, it usually makes sense to have a target allocation – how much of your investments you want in stocks and how much in bonds. You might want to rebalance or change it over time – as you get closer to retirement or as your overall financial picture changes.
In addition to deciding how much to invest and how much should be in stocks vs bonds (if any), you need to choose where to invest. In Israel it is common to invest through an investment account at your bank, although there are independent brokerages as well. Both can typically hold investments that are denominated in different currencies. In the US securities are generally bought through a brokerage house. Some of the brokerages, however, are not set up to accommodate clients who live outside of the US, so if this is how you choose to invest and you don’t live in the US, make sure to use a brokerage firm which is set up to work with non-residents.
Whether you are able to invest in a tax deferred or tax-free retirement account depends on several factors that are beyond the scope of this article, but if you are planning on investing for the long term the tax savings can be significant and should be researched, and probably discussed with an accountant or financial advisor.
There are also decisions to be made about what currency you invest in. If you live in Israel and your budget is generally calculated in shekels, it is worthwhile considering shekel investments. When investing in dollars, even if your investments do well, your bottom-line profit when calculated in shekels will be impacted by the changes in the exchange rate. If the dollar strengthens, this will help you, but if it weakens, your bottom-line profit (in shekels) will be less. At the end of the day, if you think a dollar investment will do better in the long run, it might outweigh any potential currency exposure risk, but it is worthwhile to be mindful of the currency exposure.
There are many other opportunities to invest, some of which we will discuss in further articles. But of course, it is crucial to have clarity regarding your overall financial picture before deciding to invest at all. If you can’t do it yourself, find a financial advisor who can help make sure you come up with the right plan for you.
Timely reminder before the year end …
In addition to finding the correct investments to grow your wealth, remember that taking advantage of the different ways to reduce your tax liability, and applying for refunds from charitable donations are among the excellent ways to maximize the assets that you have. If you would like a reminder of the tips we shared last year please email firstname.lastname@example.org.
Yaakov Ehrenkranz is a Senior Associate at Labinsky Financial. He helps new and veteran olim adjust to the financial reality in Israel, and offers advice to achieve financial stability and success for individuals, families and small businesses. Yaakov can be reached at email@example.com