The ifs, hows and wheres of investing

As financial advisors, we are often asked by clients or potential clients living in Israel how they can start investing their savings to maximize future benefit. Following the recent pandemic-related market volatility, the question has come up many times, as some people were hoping to buy while the markets are/were down. There is no one-size-fits-all answer to this question, as what makes sense for some people is not available to others. Many factors can play into what the best approach is, but here are a few things to think about while looking to invest.

Can you afford to invest?

Before finding out how to invest, it is first necessary to decide if you should invest. As we have written before, sound financial planning first requires a clear picture of your budget and net worth, as well as your goals. We also always emphasize the importance of establishing an emergency fund in the event of unexpected expenses or disruptions to your income. The coronavirus has been a very forceful lesson as to why this is crucial, but in truth pandemics aren’t the primary reason to have one (they don’t happen often, and we hope that will continue to be the case).  The more relevant reason is that unfortunately some type of unexpected incident or situation is likely to develop over time in virtually everyone’s life, and for those times it is essential to have funds available.  How much exactly that emergency fund should have in readily available cash varies according to each individual situation. Factors such as how many sources of income you have, the consistency/predictability of that income, and your general situation will determine the size of your fund. A family with a self-employed sole breadwinner in poor health without insurance should probably have a much larger emergency fund than a family with 2 incomes from Fortune 500 companies, but the bottom line is that everyone should have one.

How best to invest

If you have that emergency fund set up, make more money than you spend each month, and have a goal you are saving for – whether it be far off (like retirement) or sooner (like a new car, wedding, etc), it probably makes sense to start investing, the question is just how to do so.

If you live in Israel, earn income in shekels and spend it all here in shekels, the default best option might be to invest in Israel, in shekels. The current situation here, while it has improved over the years, has some pros and cons that make it different than, for example, investing in the US. While there are many cheap and easy do-it-yourself options in America, here, especially for a US citizen, things aren’t quite as simple or cheap.

That doesn’t mean it can’t or shouldn’t be done, but be ready to pay a little more and have to put in a little more effort. As we have written before, Americans need to be aware of the PFIC (passive foreign investment company) regulations which require special reporting and taxation when investing in certain funds abroad. That is not to say you are not allowed to buy any funds in Israel, but you should discuss with your accountant and/or investment advisor (who is familiar with the regulation) before doing so. If you are not a US citizen or are not deterred by the PFIC rules, you can simply buy funds in an investment account at your local bank or at an Israeli local brokerage. Note, though, that in addition to commissions on buying and selling, financial institutions here also charge dmei mishmeret, custodial fees, for housing your investments. The amount varies and is negotiable, so it might be worth shopping around or at least trying to negotiate with your bank to minimize those fees.

If you choose to invest through an Israeli bank or brokerage and you want to avoid getting involved with PFICs you will need to either pick your own stocks and bonds or have someone else do it for you. You can get help from a friend or have a licensed portfolio manager do it for you. The latter will usually require a certain minimum balance, often several hundred thousand shekels, and will add additional fees as the manager will be paid dmei nihul, management fees, but in many cases it is still well worth it. Note that if you do it on your own, the bank’s investment adviser might recommend certain investments to you, but if the adviser is not familiar with the US regulations and that is a factor in your investment strategy, he or she might be suggesting something that you prefer to avoid, so make sure to check everything out carefully before deciding.

Another way to invest is to open an account at a US brokerage. Some US brokerages are not able to take foreign residents. Even if you are a US citizen who files US taxes, some simply cannot accommodate expats. Even if you still have an American address that you use, they can – and do – track your activity and they can close your account with little warning. However, there are brokerages that cater for expats too, although sometimes with slightly limited options or services. Charles Schwab is an example of a brokerage that has a product that caters specifically to international clients.

It is important to consider exchange rate risk. In US brokerages you will be investing in US dollars. If you live your life in shekels, take into account that if your investments do wonderfully but at the same time the dollar weakens against the shekel, your take-home return will be impacted. While there are ways that investing America is cheaper (no custodial fees and often no commissions either), don’t forget to think about the foreign exchange factor.

The advantages of using an American brokerage are that in addition to being in English, which for some olim may be easier to work with, they generally have very good customer service, as well as features such as debit cards, which can be an efficient way to bring small amounts of money from the account to Israel. As mentioned, their fees are generally low, and they have many investment options which themselves are very inexpensive and not an issue in terms of PFIC.

Whichever way you choose to start investing, it is important to clarify the time horizon for which you plan to invest. Investing in stocks can be volatile, sometimes extremely volatile, as we have seen in recent months, and it is important to know how much volatility you can handle. Over the long run, at least historically, stocks have generally been a good and easy way to invest. However, for those who panic sell when markets drop, only to reinvest when things are calmer – and much higher – the returns are not nearly as good. To make a decision about how much is appropriate for you to invest, it might be worth discussing with a financial advisor who can help you quantify your appetite for risk. There is also a popular strategy called dollar cost averaging, where you invest a fixed amount of money at set time intervals, as opposed to simply investing everything at once, and by doing so you can participate in some of the gains if the markets rise quickly, and allows you to take advantage of a fall in stock prices when you buy at later dates if the market falls. It doesn’t guarantee better results, but it can somewhat neutralize short term volatility in your portfolio.

If you have decided that investing is appropriate for you, then make that move. Whether you pick the easiest route, the cheapest route, or the just whatever your friends and family have done and recommend, over the long run, if done responsibly, it will almost certainly be better than doing nothing, so speak to a financial advisor today to get started as soon as you are ready.