There are many reasons why expats may want to invest or should consider investing outside their home country.
We have highlighted 3 of the main reasons below.
1. When the money for the financial goal has to be paid in a different currency.
There are some investments that expats do outside of their home country such as buying real estate or sending their kids for higher education to universities abroad.
When they buy real estate
Take real estate for example, if an expat is living in UAE and decides to buy a real estate in UAE, the money for buying that real estate has to be paid in UAE dirhams. Therefore it makes sense to invest in a currency that is pegged to the UAE dirham such as US dollars. This way, they can avoid losses related to currency fluctuations in their home country.
When they send their kids to universities abroad
Many expats want to send their kids abroad for higher education. In this scenario, they should either match their investment currency to the destination currency if at least to the currency they are earning in, if not both.
Expats living in UAE earn in US dollars because the UAE dirham is pegged to the dollar. If they are sending their kids to the USA for higher studies, it makes sense to save up or invest in US dollars to pay for the higher education fees.
2. When they are earning in a different currency.
This is related to the point above. Expats in UAE are earning in dirhams which is pegged to the US dollar, so they are effectively earning in US dollars.
If and when they invest in any other currency apart from the US dollar, their investment will be exposed to currency fluctuations between the currency they earn in and the currency they invest.
Let’s use an example to illustrate this point. If they are earning in US dollars and they decide to buy shares of British Petroleum in the London Stock Exchange, they will have to pay for it British pounds. If the amount invested is USD 10,000, to begin with, they will get British pounds at today’s exchange rate between the two currencies.
Let’s say that their investment in BP shares went up by 40 percent over the next 5 years, it will now be worth USD 14,000 equivalent in British pounds if that currency remained at the same level as today against the US dollar. However, in case the British pound weakened against the US dollar by 10% in the same period, they would get back USD 12,600 instead of USD 14,000.
3. When rates of inflation are different.
This point is closely related to the previous point. Currencies can fluctuate up or down against each other due to many reasons. However, one of the main reasons this might happen is also due to the effect of different rates of inflation in the home country and the country where the expat is currently residing or investing in.
Inflation is the same as currency devaluation. If the home country currency devalues by 10% against the US dollar as it happened in the example above due to rise in inflation, the effect on the investment would be similar.
When Investing is goal-driven instead of just returns-driven, the clarity of where to invest and the choice of currency becomes clearer. When the clarity in the investment increases, the returns become optimal.
As always, a financial advisor’s opinion is important when investing to help clarify all these factors when investing.