I really enjoyed talking to many of my readers that emailed or called about my article “Retirement is all about safety first.” Many can relate to the common pitfalls that expats have come to discover here in Thailand. While investing in a bar or restaurant is typically a losing proposition, at least you still have a place to eat and drink. The same can be said about building a house in Issan. At least, you can go live in the Issan house if your money runs out.
Where things take a really ugly turn is for retirees that get burned on insurance-linked investment sales products and bad investments. I received a call last week from a reader who informed me of the latest scandal involving the LM First Mortgage Income Fund and the LM Managed Performance Fund. Here, investors were told that their investments were secure and backed by mortgages on Australian real estate. Investors got returns that were slightly above market rates and appealed to retirees looking for a steady income in retirement.
The problem is that now LM Investment Management has collapsed. What’s most alarming is that the agents that sold these investments are nowhere to be found as they earned their commission and moved on. Those that invested are left wondering what to do. What was pitched as being a safe investment has now turned into one big nightmare. One caller even told me the unit-linked life assurance company (Friends Provident) which was involved in selling the fraudulent fund, is still charging him 1.5% on his original investment which is now worth zero.
What happened was that the sales agents for LM Investment Management were paid upfront commissions to get clients. The agent typically got 5-9% of the amount invested. As you can see, there was quite a bit of incentive to tell the clients whatever they needed to hear to get them to invest. And what was pitched is what we all want to hear – steady appreciation, safety, regular payouts, etc.
I on the other hand, cannot guarantee you that. Matter of fact no one can. There is no guaranteed investment, except maybe US Treasury Bonds (some risk here too). My clients and I invest in the stock market. Stocks go up and they go down. The best that we can do is diversify and buy good quality stocks and Exchange-traded funds (ETFs) that trade on the US New York Stock Exchange or Nasdaq and are regulated by the Securities and Exchange Commission and have a long-term outlook.
One fund company that I like for my clients is Vanguard. Vanguard is the world’s largest fund company, with about $2.4 trillion (yes, that’s trillion) invested in the U.S. across more than 170 different funds. One Vanguard fund I like in particular for my clients is the Vanguard REIT ETF. This ETF (exchange-traded fund) invests in US real estate investment trusts that own office buildings, hotels and other properties. The Vanguard REIT ETF was formed in 2004 and today has $44.1 billion in assets. Had you invested $10k at inception in 2004, you would be sitting on $23,978 today. That’s an annual return of 9.29% over the past ten years. Currently this fund pays a dividend of 3.7%. I called Vanguard yesterday and asked them how many of their funds in the past 10 years have gone out of business, they said, “zero”!
Vanguard has 123 mutual funds and 52 diversified ETFs as of August 2014. All their funds trade on the New York Stock Exchange (NYSE) or Nasdaq and the mutual funds are open-ended regulated by the investment act of 1940.
The problem and where I feel bad is that those that bought the LM Funds in Australia were pitched like they were investing in Vanguard. Investors that bought the LM Funds should have invested in Vanguard, but they were sold a bill of goods. With Vanguard, you don’t have to worry. The only risk to investing in Vanguard is the normal market fluctuations. Can your investment go down? Of course it can. Back in 2008 during the financial crisis, the $10k you invested in 2004 was down to $6114.07. But had you ridden the downturn and held on, you’d be sitting on almost $24k today. That’s the nature of capitalism and markets. They go up and they go down. Key is to invest money that you don’t need tomorrow. You really need to have a 7 to10 year time horizon when it comes to investing in the stock market. If you don’t, then the stock market probably isn’t for you.
My clients hire me to eliminate risk as much as possible, diversify across different sectors of the market and realistically help them achieve their goals. There are many types of risks that can be eliminated and some which are inherent when investing in the global markets. I will save this discussion on “risks” for another article which I am writing now.
I don’t want anyone to experience a retirement nightmare. But I also want people to be realistic. The most important thing is investing in a sound firm. Stick with the Vanguards of the world that have trillions of dollars. I mean if Vanguard goes under, the whole world is going under. As they say, what’s the difference between a Recession and a Depression? A Depression is when you lose your house. A Recession is just when your neighbor loses his house. Hopefully, none of us experience a Depression. That’s why my clients and I stick with the Vanguards of the world.
Don Freeman is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket, Thailand. He has over 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers.
Call 089-970-5795 or email: email@example.com.