Millionaire Expat. Andrew Hallam

Millionaire Expat - Andrew Hallam


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of London, reported a study for The Economist, suggesting that the average actively managed unit trust in Great Britain underperformed the British market index by 2.5 percent each year. Fees contributed to those poor returns.3

      You might think that's nothing…a bit like a waiter's tip. But it's more like the tip of an iceberg. Here's an example. A 30‐year‐old investor might have an investment time horizon of 55 years. She would start selling parts of her portfolio once she retires. But she would keep most of the money invested, selling portions of the portfolio each year to cover retirement living costs.

      If someone invested £5000 and it averaged 8 percent per year, it would grow to £344,569. But if £5000 averaged 5.5 percent per year, it would grow to just £95,028.

      Other countries' actively managed funds don't perform any better. Over an investment lifetime, beating a portfolio of index funds with actively managed funds is about as likely as growing a giant third eye.

      Unlike most global expats, Americans can't legally shelter their money in a country that doesn't charge capital gains taxes. And actively managed mutual funds attract high levels of tax. There are two forms of American capital gains taxes. One is called short‐term, the other long‐term. Short‐term capital gains are taxed at the investor's ordinary income tax rate. Such taxes are triggered when a profitable investment in a non‐tax‐deferred account is sold within one year.

      I can hear what you're thinking: “I don't sell my mutual funds on an annual basis, so I wouldn't incur such costs when my funds make money.” Unfortunately, if you're an American expat invested in actively managed mutual funds, you sell without realizing it. Fund managers do it for you by constantly trading stocks within their respective funds. In a non‐tax‐sheltered account, it's a heavy tax to pay.

      Most financial advisors wish to muzzle the brightest minds in finance: professors at leading business universities, Nobel Prize laureates in economics, the (rare) advisors with integrity, and billionaire businessmen like Warren Buffett. Brokers make more when experts are mute.

      Nobel laureate Sharpe explains it's delusional for most people (and most advisors) to anticipate beating market indexes over the long term. In a 2007 interview with Jason Zweig for Money magazine, he stated his view:

Sharpe: The only way to be assured of higher expected return is to own the entire market portfolio. You can easily do that through a simple, cheap index mutual fund.
Zweig: Why doesn't everyone invest that way?
Sharpe:

      Merton Miller, a 1990 Nobel Prize winner in economics, says even professionals managing money for governments or corporations shouldn't delude themselves about beating a portfolio of index funds:

      Your financial education is the biggest threat to most globetrotting financial advisors seeking expatriate spoils. Consequently, many are motivated to derail would‐be index investors from gaining financial knowledge.

       Self‐Serving Argument Stomped by Evidence

      Index funds are dangerous


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