Are you an expat living abroad? You might be wondering if there are multi-currencies (USD, GBP, EUR) fixed-income annuity for Expats. Today we will review the kind of risks associated with investing in fixed-income investments.
Are bonds safe and guaranteed?
When investing your funds as an expat in 2023, you might be wondering why your most conservative investment assets lost more than 10% in one year. In a normal year stocks and bonds balance each other.
In a balanced portfolio, you would hold stocks and bonds. Your stocks are more aggressive and your bonds are more conservative in nature. Bonds provide constant income but that income is not guaranteed.
It is important to know that the value of the bond is closely tied to the interest rate especially the 10-year treasury rate in the US.
When the Federal Reserve increased the fed fund rate in 2022 with the goal in mind of reducing the inflation rate, it affected the value of all bonds already in the market. On a rare occasion, stocks and bonds lost more than 10% each in the same year.
In a year that should experience a mild recession in the US and Europe, it is important to acknowledge that the quality of the company issuing the bonds can also influence the value of bonds. If companies go under, it is more likely that the payment of interest may stop. These corporate bonds are then less attractive and lose value at the same time.
Bonds Vs Principal Protected Investment options
Now that we have reviewed how bonds work we can explore a more conservative investment option. To eliminate fluctuations in the principal, another entity must protect investments..
Insurance companies have the power to use the term “Guarantee” linked to some of their investment options. Not all investments offered by insurance companies have guaranteed. If you are wanting to protect your funds and do not like to see the value change, it is one of the only ways you can achieve this.
We partner with great insurance companies that offer Guaranteed Fixed Rates for 3 to 10 years in multiple currencies (USD, EUR, GBP). You can then receive a better interest rate with no value fluctuations. There is usually a 10% yearly withdrawal on each insurance policy.
Even if you possess US Treasuries, the current interest rate in the marketplace will impact their value. The other option is to invest your funds in a bank certificate of deposit or savings account. Most large banks in the world do not offer great interest rates because they have large cash balances. Therefore, they do not need more cash on hand.
With the problems we have seen with some banks in the US and Europe, it is important to understand how banks generate a profit when you give them your funds.
Banks lend money in the form of mortgages, auto loans, business loans, and credit cards by leveraging capital. Insurance companies invest in safer investments with high liquidity requirements to guarantee principal.
Interest rate risk
The value of most fixed-income investments will depend on the interest rate available in the market. When interest rates go up as they did in 2022, the value of current fixed-income investments goes down.
If the interest rate in the market goes up and the same company offers that bond with a 15% interest coupon, no one will be interested in your old bond with a 10% interest coupon because the new rate is more attractive.
The value of the old one needs to go down in order to make it attractive to new investors again.
Inflation risk
As we have seen this past year, the rate of inflation can affect your investment and it also in an indirect way devalues the amount you have in savings. It is important to have some funds in cash in a savings account used for daily expenses and for emergencies.
When inflation was below 2%, it was still a net negative yield to keep funds in cash but with inflation at above 5% for the last year that means your net yield is negative by more than 5%. That means your purchasing power is lower by that percentage.
It is important to find solutions that will keep up with the rate of inflation.
Multi-currencies Fixed Income Annuity for Expats – What to do to protect your portfolio
If you are a conservative investor and the fluctuations in your portfolio concern you, please feel free to contact us.
You might have funds overseas that would earn a higher interest rate with better protection in a solution that can be fully explained to you by a cross-border financial advisor.
If you would like us to review your situation and see how we can bring value to your investment accounts, don’t hesitate to get in touch.
