Mark Hibbs, senior financial consultant with
Towry Law International Japan, gives you the basics on investing.
Arguably the most important factor to
understand before investing in the offshore market place is the concept of
"risk." Defined as the "volatility and unpredictability of returns,"
risk can be measured by calculating the deviation from the norm. Financial instruments
(stocks, shares, etc.) that behave considerably differently from the average are perceived
as possessing higher volatility and therefore a correspondingly higher risk. The more
volatile and unpredictable an investment, the higher the risk it carries.
Consider a portfolio comprised solely from a share in a single company. This carries more
risk than a basket of say, 20 different stocks; hence the birth of the mutual fund or unit
trust as a means of spreading risk. The concept of "diversification" - the
spreading of risk between different areas of investment - can be effected geographically
(investing in different countries), by company, by industrial sector (e.g. manufacturing
or retail) or by asset class. The four main asset classes are cash, stocks, bonds and
property. Ideally your investment portfolio should contain all four in proportions
dictated by your overall risk profile.
Another factor important to consider is the base currency of your investment. Do you
intend to remain in Japan or do you plan to return to your home country? Which currency is
the most relevant to your particular circumstances? Once you elect your base currency,
bear in mind that currency values do fluctuate. The major currencies for investment are
the US dollar, the euro and the yen. The British pound (sterling) should only be
considered if you intend to live in the UK at some point in the future.
The time of your life
The final consideration is "time scale," which is closely linked with risk.
You'll need a good investment horizon if you're to make a reasonable return. Unless you
are a speculator prepared to trade in and out of the markets, money should be kept in cash
on deposit for periods of less than two years. Usually a minimum of 3-5 years should be
allowed in order to make a reasonable profit. Remembering the basic rule, "the longer
left the better," and adopting a longer-term investment horizon will actually lower
your overall risk as you can accept greater market volatility. If your investment horizon
is short-term, you should correspondingly opt for lower risk investments and perhaps lower
So how much risk are you willing to take with your money? The attraction of making large
sums of money has to be balanced by the specter of capital loss.
Interest and deposits
Cash on deposit in your base currency carries no risk, assuming that it is placed in a
sound institution. The interest you receive on savings is dictated by the prevailing
interest rates in the country whose currency you hold. You may be able to improve on the
rate received by putting your cash on "call deposit" for 30, 60 or 90 days.
Another risk free option to consider is the Managed Money Fund (MMF), where the fund's
manager basically chases the best deposit rates around the globe in order to improve on
cash deposit rates.
The next step up from cash, with minimal risk to your capital, is the British
"With-Profits" style of investment. Offered by several large UK-based Life
Assurance companies, the initial capital is guaranteed; the fund grows through the
addition of annual bonuses that once added cannot be taken away. Usually denominated in
the US dollar, the euro or sterling, With-Profits are designed to offer investors a
secure, low-risk alternative to direct exposure to the equity markets. The returns
comprise two elements: an annual dividend declared in advance, which is linked to cash
rates; and a terminal or claims bonus, which is typically paid annually to reflect the
medium- to long-term performance of an underlying fund. This fund comprises all of the
major asset classes mentioned above. For the conservative investor they are highly
recommended if you have a five year timeframe.
Mutual funds and unit trust
The most well-known product available for investment in the offshore market place is
without doubt the mutual fund, or unit trust. The risk of this investment depends on the
underlying asset class mix, together with the investment manager style. The most common
type of fund is the equity fund, and there are literally thousands available. Stocks and
shares are inherently subject to the vagaries of the world's stock markets, with no
capital guarantees generally available. Depending where the manager invests, risk can vary
between medium (a well-diversified basket of shares in a major market such as the US) to
speculative (Indian company shares). In a less-risky bracket, there are also managed funds
that invest in a mix of stocks and bonds (government debt) and pure bond funds where the
risk of capital loss should be very low.
Wave of the future
In recent years we have also seen the emergence of the Alternative Investment
Strategy-probably better known as the Hedge Fund-in the retail market place. Previously
only available to institutions and high net worth individuals, these funds employ almost
as many investment strategies as there are fish in the sea. The available range from
aggressive high-risk strategies to low-risk defensive management styles can be very useful
in diversifying risk within an investor's portfolio. This "Market Neutral" style
is highly recommended in times of high volatility. For the more adventurous among you
there is also the high-risk strategy of direct purchase of stocks over the Internet, if
you are prepared to accept the volatility.