This is the second article in a series of personal finance and investment articles mainly for American expats, though domestic residents and non-Americans will find it useful as well.
101 is a foundation for everyone, but particularly useful to those with student loans or other debt
201 is a primer to investment for those with no debt, or with savings of less than $10,000
301 is an examination of stocks for more sophisticated investors
302 is an examination of bonds for anyone
This entire series is aimed at math illiterates who are either too lazy or too stupid to learn investing and personal finance the traditional way. If you are unsure of which category you fall under, or if you were offended by the previous statement, take a second to derive 'X'. If it took you more than one second, or if you thought the answer was a letter, read on.
EF201 Investing With Taxable Accounts
Counter-intuitively, working abroad makes investing easier and simpler in many ways. Generally, you can not contribute to an IRA. IRAs are for people who pay US income tax, and form 2555 exempts up to $95,100 of your foreign earned income from US income tax.
The bad news is, you will be paying taxes on your investments.
The good news is this simplifies your options tremendously, making investing easier to learn.
This article assumes you
- Are American
- Have savings in USD or KRW
- Can not make IRA contributions
- Don't want to be poor when you're old.
This article will nudge you in the right direction, but more importantly, steer you away many bad ones..
1. What are my options?
Retarded Shit You Won't Be Doing
Being ineligible for IRAs means you can only invest in a plain old taxable account. People with IRAs take advantage of them by investing in tax-inefficient products. These products pay out taxable money rather than merely increase in value. These tax-inefficient investments include any of this shit:
- Balanced funds (e.g. Vanguard Lifestrategy)
- Most bonds
- Active stock funds
- Treasury Inflation Protected Securities (TIPS)
and definitely all of this shit
- Real estate or REIT funds
- High-turnover active funds
- High-yield bonds
If you didn't know what these things are before, you don't have to worry about them now.
Another thing we won't be investing in are Certificate of Deposits, because they are at an awful value and will continue to be until interest rates rise (The Fed is not going to do this until the economy gets much, much better.).
Now let's talk about what we will be investing in
Korean Certificates of Deposits
I work in Korea so I can invest in Korean CDs. Think of CDs like a relationship you develop in this country. Even if you go in balls deep, there's a one year time limit and when the contract is up, you're pulling out. There are some great reasons to invest in these low-risk, low-reward products if you live in Korea.
First, it gives you international diversification- US inflation will not devalue your money. In fact, the KRW may even appreciate, as it did last year.
Second, CDs are simple, safe and have no volatility. You give a bank some money, and a year later it gives you back a little more.
If you have a KEB account, ask about the 12-month E-Partner Time Deposit or just open it online. They offer 2.9% interest, so If you deposit 1,000,000 won, you'll get an extra 30,000 won or so 12 months later1. Nonghyup (NH) is a much bigger bank with better rates and a debit card with nice rewards. I suggest investing with them if you can. Using a Korean debit card has tax benefits as well.
Tax-efficient Forms of US Stocks and Bonds
CDs are ok if you're old and risk-averse. For those of you with savings in the US and don’t mind taking on more risk for more money, you will want to look at some US stocks and bonds. These investments include:
- Index funds (high volatility stocks)
- Savings Bonds (medium volatility, higher tax penalty)
- Municipal Bonds (medium volatility, federal tax-free)
These investments should be treated like a pot roast that you let marinade for ten, twenty, thirty years. You might take a peek once a year and poke at them every two, but you'd only take it out when it's ready to eat or if it's an emergency. That is how Berkshire Hathaway makes billions. Not from maverick stock-picking, but from patience and emotional stability.
2. Getting Started
You could go with
whatever your employer offers, but chances are, the options are
limited and the fees are high.
You could go with Chase or E-trade, and get destroyed by high fees.
You could go with Schwab or Vanguard, but you'll need $3,000 for just one fund alone.
Betterment on the other hand, requires no minimum deposit and diversifies your money across thousands of stocks and bonds for you. The interface is simple and clean, as idiot-proof as it gets. All you have to do is decide what % you'd like to invest in stocks and bonds. All the math is not only done for you, but visualized in a graph- things like projected growth, historical growth, best and worst-case scenarios. Their advice is non-intrusive and based only on what you say your goals are. They also have many meaningful benchmarks to compare your progress.
There's no minimum deposit: If you invest less than $10,000, the annual fee is waived and you pay $3 per month. Regardless of how much you deposit, if you contribute $100 a month, the fee is reduced further.
Betterment's fees are far lower than any fund manager's because they don't try to beat the market. Their funds are tracked to an index, in fact, several indexes. All you do is drag a slider to change what percent of your money you want in stocks (higher risk), and what percent you want in bonds (lower risk).
Betterment also re-balances your portfolio constantly but I won't get into why that's important, but it's a good thing.
Betterment doesn't pay me shit if you sign up. However, if you'd like a $25 signup bonus for investing $500 and keeping it there for 60 days, leave a message in the comments and I will email you a link.
I think what I covered here is more than enough information to start investing with a good degree of confidence. I say 'good degree' because too much confidence is often deadly. In Expat Finances 301, I will discuss the stock investments that are the most complex I am willing to go as an expat investor.
1You get more than the interest rate because of compounding.
2 I'm not one of those nuts that thinks The US will be the wealthiest nation until the end of time, or even the century. I've read the Black Swan, and yes, a huge one will inevitably appear in the US again, just like it did on 9/11. However, I believe America is relatively robust (We aren't robust at all, just compared to other countries) because they have an incredible amount of economic, military, cultural, and political influence. Above all, the US has a massive and advanced agricultural grid and tons of natural resources. The world depends on US in a frightening number of ways.
Put it this way; if the US bleeds a drop, the world will bleed an ounce.