I’ve just returned from nearly three weeks in Europe, where I visited with my network of international bankers, asset managers, and trustees. I heard over and over again that while it’s still possible for Americans to invest internationally, fewer are doing so than in the past.
That’s understandable in light of the ongoing campaign by the IRS and the mainstream media to demonize all things offshore. The recent release of the so-called Paradise Papers is a perfect example. While almost none of the strategies or investments the stolen documents revealed are illegal, the media had a field day highlighting the opportunities for tax avoidance and potential conflicts of interest.
It’s a mistake, though, to rule out all things international in your investment strategy. The advantages of maintaining a portion of your wealth outside the US (or wherever you live) are compelling. Here are eight to consider:
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Access to investment and business opportunities not easily obtained in the US. While America has the world's largest securities markets, more than half of the world's stock investment opportunities, as measured by capitalization, are in other countries. It’s far easier to target international investments through a domestic broker than it once was, but many non-US investments are nearly impossible to purchase domestically.
For instance, Americans can purchase foreign securities traded on US exchanges called American Depository Receipts (ADRs). However, only a few thousand foreign securities are listed, representing the largest companies in the most developed foreign markets. Other foreign shares are traded in the over-the-counter (OTC) market. But ADRs and OTC shares are often less liquid and have higher buy-sell spreads than shares traded on local exchanges.
Securities of most other foreign companies, especially smaller ones, are available only on their local markets. Some domestic brokers can execute trades in foreign securities, but generally only in the largest and most liquid exchanges.
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Protection from a falling US dollar. International investing provides valuable exposure to foreign currencies. That’s important because, in recent decades, the US dollar has lost value in relation to stronger currencies. For instance, in 1970, a US dollar purchased approximately 4.4 Swiss francs. In 2017, the franc traded at near parity to the greenback. That’s a nearly 80% loss of the dollar's value against the franc. And while there is an increasing number of ways US investors can make a domestic purchase of foreign currencies, non-US banks and brokers often offer higher yields and lower minimums.
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Protection from professional liability and other claims. Domestic strategies and structures to avoid lawsuits aren't always effective. International investments and structures enhance your ability to protect assets from judgments, civil forfeiture, business failure, divorce, exchange controls, repressive legislation, or political instability.
It's also much more difficult for a successful litigant to collect against international assets. No country automatically enforces US civil judgments, and many countries don't enforce them at all.
As well, the legal systems of most other countries discourage frivolous litigation. Outside the US, the loser must generally pay the winner's legal bills, courts can't award punitive damages in civil disputes, and lawyers may not accept contingency fees. Someone suing you may even be forced to post a bond to cover your legal expenses if you prevail in court.
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Increased privacy. International investments offer immense practical privacy advantages. They largely avoid sophisticated US asset-tracking networks, which permit investigators to locate domestic wealth at the click of a mouse. "No recoverable assets" usually means no lawsuit, particularly if the attorney handling the matter is paid on contingency.
What’s more, other countries restrict disclosures from financial institutions, except under narrowly defined circumstances. The wholesale data sharing between banks, information brokers, and the government that has become commonplace in the US is banned in virtually every other country. The practical consequence is that once you've moved funds internationally, your assets are invisible to all but the most determined domestic investigators.
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Investment continuity. The attacks of September 11, 2001, demonstrated the vulnerability of the US financial infrastructure. US securities markets were closed for four days after the attack. During that time, US investors with only domestic bank or brokerage accounts couldn’t trade. But US investors with foreign accounts could trade foreign securities on foreign exchanges.
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An investment lifeline for individuals and families threatened by persecution or totalitarian governments.
Technological innovation and falling legal barriers have made it possible for governments to monitor citizens’ financial dealings to an unprecedented extent. The Nazis identified victims from paper records. How much more efficient would their extermination (and confiscation) efforts have been if they had been equipped with modern technology? Offshore investments can be a lifesaver if the worst happens where you live.
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Reduced portfolio risk. Globally diversified investment portfolios carry significantly less long-term risk than those concentrated in only one market. Investment risk is diversified across different securities markets, currencies, and legal systems. A study by the Federal Reserve Bank of Dallas demonstrates that a portfolio with 20% non-US stocks would have experienced both higher returns and lower volatility than a portfolio consisting of US stocks alone.
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Tax savings opportunities. While it might not be politically correct to say it, legitimate ways to save taxes internationally exist. For instance, you can invest your IRA offshore and get the same tax benefits as you would domestically. You can also buy US tax-compliant annuities and life insurance policies internationally. And you’ll have access to an entire world of investment opportunities. Further, if you live outside the US full-time, you can exclude about $100,000 of your earned income annually from any US tax liability.
Of course, it’s important to conduct due diligence on any foreign investments you’re considering. If you’re interested in buying real estate, for instance, make sure that the seller actually owns the property and that no third party has made a legal challenge to it. If you’re buying precious metals, deal only with recognized dealers that can prove that you have legal title to the metals you’ve purchased. And if you’re opening an offshore bank account, review the annual report to ensure that the bank is well capitalized.
Also, be certain that you and your accountant understand your tax and reporting obligations when you invest internationally. International real estate holdings and precious metals you have direct control over (e.g., in a safe deposit box) do not need to be reported. But most international account relationships are reportable.
If you’re looking for resources on how and where to invest internationally, we can help. Check out our website at www.nestmann.com, or sign up for one of our membership options to learn more about your options.
Finally: Don’t be paralyzed by fear of social disapproval. The only money you stand to lose is your own.
