The quickest (non-spending way) to increase your returns

In previous blogs I have spoken about how spending habits are much more important than income when it comes to building wealth.  However, let’s say you have good spending habits, and are looking to save and invest more, to achieve financial freedom. What’s the easiest and quickest way to get there? Probably negotiation, and specifically, negotiating your salary. 

Even for high earners, negotiating a $5,000 a year rise could lead to you having more than $1M extra in 30-40 years, if you invest the $5,000 wisely.  That is based on pretty normal market returns.  An average return of 10%10.5% doesn’t sound like much, but over 30 years it is huge.

Many people feel, perhaps due to culture, that it is rude to even negotiate on their salary. I am from the UK, and that is defiantly a cultural norm for some British people.  But asking is the first step and you need to be prepared to do that.   Of course, coming to the meeting armed with facts about whether you are being underpaid will help, and there are numerous websites that allow you to compare how much you are getting paid compared to others.

However, in addition to that, it has to be reminded that people can be emotional even in business, so having facts alone isn’t always enough. In the classic book `Getting to Yes` Fisher and Ury develop some common strategies to getting a pay rise including:

 – Focusing on mutual benefit, not just your own 

 – Really listening to the other person 

 – Having a best alternative to a negotiated agreement, if negotiations break down.

There work has been criticized by some, and others claim it is idealistic in part as people find it hard to trust others, which is one reason negotiations are difficult. Certainly the former CIY staffer Chris Voss, who wrote Never Split the Difference, believes so.  Win-win only exists when both sides are reasonable.

Added to the problem is human irrationality.  The Noble Prize winning psychologist Daniel Kahneman showed that most human decision maker is guided by our emotions, and not rationality.  We don’t negotiate as hard with people we like, for example.  Knowing this bias before going into a room with somebody you like (your manager, boss or whoever) can help you get a better deal, if you pledge to yourself that you will still negotiate hard despite the good feelings involved.  

The Dale Carnegie Institute also lists 6 good techniques for any negotiation:

1. Know what you want  Sounds obvious but many people don’t know what they want 

2. Know what your counterpart wants – what will your employer want?

3. Anticipate objections – what will be the likely objections of your boss or manager?

4. Identify concessions. – Some things should be up for negotiation and some things need red lines 

5. Determine your “walk-away”  – when will you walk away and when will you agree?

6. Practice with a partner before the negotiation  practice makes perfect

Salary may be the easiest and most beneficial way to increase your income and long-term wealth, but negotiating on credit card fees if you have debt, gym membership and other things can also make a small difference.

Finally, as a motivator, remember that the extra $5000 a year rise might be the difference between being financial free at 55 as opposed to 65, or living off fine wines or dog food in retirement.  So it can really matters to get negotiations right. 

Remember also,wealth is just income-expenditure x compounded returns.  Work on all three components; costs, income and returns.

Bonus material

1.How to save money on auto insurance 

2.  Biggest financial reasons for divorce and how to avoid it.

How to retire early

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

There are essentially two ways somebody can retire early.  One is well known.  Start saving and investing early.  The below graph looks at how, assuming a 7% average inflation adjusted return (which is standard. The US markets have historically produced 10%-10.5% before inflation and around 7% after inflation).

Amount saved per month  5 years  15 years  30 years  40 years 
$200 $14,319 $62,572 $235,212 $528,024
$1,000 $72,010 $318,811 $1,227,087 $2,640,124
$,2000 $144,021 $637,622 $2,454,174 $5,280,249

Despite the fact that compounding is well known, a lot of people might be surprised by some of these numbers.  Somebody who starts investing in their 20s, could easily become a multi-millionaire by their 50s and a multi-millionaire by their early 60s inflation adjusted for todays prices, without needing to be rich. Certainly some were surprised when this secretary became a multi-millionaire and donated her money upon death.

However, human nature gets in the way.  Few people save early, unfortunately, even if they can.  Marketeers try to convince us that we will be happier if we spend money to try to impress people we don’t even like.  Get rich quick schemes are abound.  As Warren Buffett said, getting rich quick is hard.  Getting rich slow is relatively easy.

But sometimes life gets in the way, even for people who did the correct thing.  Divorce, disability and redundancy may occur.  What can people do in this situation?  One option is to retire overseas.  Numerous articles have listed the cheapest places to retire overseas.

Based on a safe withdrawal rate of 4%, even a $528,024 retirement pot, could give a retiree an income of $21,120.  Living overseas isn’t always cheap.  Certainly health insurance won’t be cheap for a retiree.  Before living overseas, it is always sensible to visit the place you plan to retire, perhaps spending 1-2 months there.  This will help you understand how much you really need to budget for.

Above all else, it makes sense to review your portfolio before retiring, to ensure it will meet the 4% withdrawal test.

Does DIY investing work?

Does investing your own portfolio work? For the majority, unfortunately it doesn’t.  The S&P has historically produced about 10% as mentioned before, but the average investor has produced about 4% per annum, despite the low fees of such platforms.  What could explain such a big discrepancy?  

It is human nature to allow emotions such as fear, greed and egotism get in the way.  Overconfidence is one of the biggest killers of portfolios.  Barber and Odean in a 2000 paper show that “after accounting for trading costs, individual investors underperform relevant benchmarks. Those who trade the most realize, by far, the worst performance. This is what the models of overconfident investors predict”  (http://faculty.haas.berkeley.edu/odean/papers/gender/BoysWillBeBoys.pdf)

Then with a different data set, Odean [1999]  finds that “the securities individual investors buy subsequently underperform those they sell. When he controls for liquidity demands, tax-loss selling, rebalancing, and changes in risk aversion, investors’ timing of trades is even worse. This result suggests that not only are investors too willing to act on too little information, but they are too willing to act when they are wrong.

These studies demonstrate that investors trade too much and to their detriment” (http://faculty.haas.berkeley.edu/odean/papers/gender/BoysWillBeBoys.pdf). Another paper, based on a huge 100,000 sample, showed that average DIY investors lose to the market by 6%…..per year!

It is human nature for people to think they are smarter than the average, and can stock pick.  Pick the winner, those individual stocks that will outperform.  Shows such as CNBC and Bloomberg also encourage investors to think they cant time the markets.

Consider something for a moment.  If you stock pick (individual stocks) rather than buying funds, you have an 80%+ chance of beating the market over a 5 year period. That goes down to about 98%+ over a 40 year + investment career.  There are many reasons for this.  Even small costs of buying and selling build up.  

Good short-term returns, moreover, increase egos, and complacency comes into play. One of the biggest reasons is that the information is all there transparently, so there is no such thing as a free lunch. Remember, all the information about companies is publicly available and there are people whose job it is to look at this information and weight the pros and cons of all that information.

Take tech as an example.  It was true in the 1990s that those IT geeks who correctly predicted the future, could have made tones of money. Certainly early investors in Facebook or Amazon did.  

However, it would have been madness to put a significant percentage of your wealth in Amazon in 1995. A rational investor can only make decisions based on the information he or she has available at the time.  

Predicting the future is almost impossible and those who get it right once, probably won’t next time. There are so many unknown unknowns and know unknowns for all companies, and especially start-ups. 

If Amazon’s CEO would have died 20 years ago, or there would have been a huge scandal or employees would have joined a competitor on mass, the company would never have succeeded.  Who knows, maybe Amazon almost went bust early on before they publicly revealed information which only becomes a legal requirement once it goes public.  

And more to the point, even though tech has on average done well over the last 20 years, most tech firms have gone bankrupt.  Buying the market and a broad basket of companies isn’t speculating.  It is just assuming that, like always, in the long-term, the biggest 100-200-300 companies in the US or elsewhere will be worth more money in 10-20-30 years than today.  

So regardless of whether in 2050 most of the S&P is financial services, law, consumer goods or even bitcoin mining companies (i doubt that though!), an investor who buys the market will profit.  

They just won’t profit as much as somebody who invests 100% of their wealth in the one coin that beats the market!  One of the reasons the average DIY investors only makes on average 4%-5% per year when markets have gone up (historic average) 10% per year, is because they assume they are smarter than others due to `research`.

It is human nature to think you are smarter than the average, but the academic evidence is clear that enhanced knowledge won’t allow you to consistently beat average market returns.  You will almost certainly beat the market some years, but on average, you will lose long-term.

Beyond that, self-motivation is an issue even for people who are hard-working.  Most of the people reading this have probably gone to the gym, tried to lose weight and/or gain muscle. How many have successes?  How many of people reading this have remained constantly motivated day in day out, year in year out? That is tough, but being a rational investor, requires that kind of discllipine.  

It is isn’t egotism and lack of self-motivation that causes us to trade more.  Panic and greed also play a part.  It is a natural human emotion to want to invest more when markets are going well, or sell when markets are down or at least to stop contributing.  Studies that shown that if you tell somebody that they have a 95% chance of making money,  they are more likely to invest than if you tell them they have a 5% chance of losing money.  

The 1990s also didn’t help.  During the fantastic winning run for stocks, especially in the technology stocks on the NASDAQ, many people with little or no knowledge made a lot of money from stocks.  Anybody can make money in a bull market, and this gives people overconfidence.  

The human mind isn’t a rational one and an investor who wants to be logical is fighting against these urges to get better returns.

Further reading:

  1. Contact me 
  2. How to become rich by investing 
  3. Property vs stocks 
  4. Getting a mortgage in the UK

American expats: biggest financial planning errors

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

Financial planning has become more complicated for Americans since 2014, and the FACTA laws. Below are some of the key mistakes made by American expats living overseas:

1).  Procrastinating.  

This isn’t just an issue for Americans.  Trying to time the markets or thinking `now isn’t the right time`, is something most people do, regardless of their nationality.  You can’t time markets.  Markets rise fast over time, but the ride isn’t a smooth one. Now is always the time to get in.  Likewise, now is the past time to get insured, and get life coverage if you have children.  

2).  Investing too much in their country of residence.

It isn’t uncommon for expat investors to over-invest in the real estate markets in the country they are living in, or the equity markets in the place where they are residing.  However, unless they are going to live there long-term, this has risks.  Currency risks, if the country doesn’t use the USD, and liquidity risks – can you get the money back when you really need it if the asset isn’t easy to sell?  

3). Failure to report financial assets and businesses

For Americans living overseas, there are reporting requirements for investments, including the FinCEN Report 114 (FBAR), IRS Form 8938 (Statement of Specified Foreign Financial Assets), and IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).  

Even Americans who own companies and Controlled Foreign Corporations (CFCs), foreign partnerships and trusts. A costly example would be failing to fill out form number 5471 for a CFC often leads to fines of $10,000 per form and results in the axpayer’s entire return to an indefinite audit.

4). Estate planning.

If you have a will in the US, and you live abroad, you may have to change strategy, as the will or trust may not be valid overseas or will trigger tax implications.  

5.  US retirement accounts and foreign earned income 

When you live overseas as an American, you can still contribute to a 401K.  However, before deciding whether to contribute or not, remember that the local rules in your new country of origin will affect your local tax obligations.  Making assumptions can be the killer of returns.

6. Losing control of your finances to a partner

This is a bigger issue in East and South East Asia, and like points 1 and 2, isn’t just an issue for Americans.   However, it isn’t uncommon to find expats in the region handing over their assets and pay cheque to their wives and partners.  Unless the trust is 100% and your partner is a financial professional, I shouldn’t need to elaborate more about why this isn’t a sensible strategy!  

7.  Foreign pension plans 

Some Americans are enrolled into foreign pension plans automatically when they come overseas, so don’t think about the implications of going into the plans.  However, not all foreign pension plans receive favorable treatment from the US tax authorities.  For example, local tax benefits may be nulled by U.S. tax treatment and double taxation could occur in the worst case scenario.

How much can you safely withdraw from a portfolio in retirement?

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

Many people are worried. They are close to retirement.  Do I have enough to retire. What if markets fall?  If I live for 30 years, will I have enough to survive?

In Sustainable Withdrawal Rates From Your Retirement Portfolio, Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz examine how safe it is to withdraw specific amounts from your portfolio, depending on the percentage of your portfolio which is in stocks relative to bonds .  

In their own words on page 1 of their report (http://afcpe.org/assets/pdf/vol1014.pdf), “The study looks at the effects of a range of nominal and inflation-adjusted withdrawal rates applied monthly on the success rates of retirement portfolios of large-cap stocks and corporate bonds for payout periods of 15, 20, 25, and 30 years. A portfolio is deemed a success if it completes the payout period with a terminal value that is greater than zero. Using historical financial market returns, the study suggests that portfolios of at least 75% stock provide 4% to 5% inflation- adjusted withdrawals”

The results of their figures from 1926 until 1997, are below:

Payout period

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

100% stocks
20 years

100

98

96

94

91

83

72

58

45

40

25 years

100

98

96

92

88

75

58

44

38

29

30 years

100

98

95

91

84

74

60

49

37

33

75% stocks, 25% bonds
20 years

100

100

100

96

94

83

68

51

38

30

25 years

100

100

98

96

90

73

50

40

29

19

30 years

100

100

98

95

88

63

51

35

26

14

50% stocks, 50% bonds
20 years

100

100

100

100

98

83

55

36

17

4

25 years

100

100

100

100

94

58

35

13

2

0

30 years

100

100

100

98

81

42

19

5

0

0

25% stocks, 75% bonds
20 years

100

100

100

100

100

62

23

11

4

0

25 years

100

100

100

100

60

17

6

0

0

0

30 years

100

100

100

95

21

5

0

0

0

0

100% bonds
20 years

100

100

100

91

47

36

15

4

0

0

25 years

100

100

96

48

29

8

2

0

0

0

30 years

100

100

53

26

2

0

0

0

0

0

The above figures show that taking out 4% is safe, and usually 5% is safe.  Some caveats should be added here.  For people who want their kids to get an inheritance, withdrawing 4% is sufficiently conservative to ensure the money will be worth the same in inflation adjusted terms I’m the future.

Sure, your account won’t compound by the 8%-10% before inflation and 6% after inflation you can expect before drawing down, but your account should be worth AT LEAST the same in inflation adjusted terms in the future. Taking out 5% is probably safe in terms of not running out of cash, but it might mean the inheritance you give your kids is worth less than the pot you have now. 

How can we forecast future returns from past results?

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

Can we forecast future returns from past results? The short answer is we can’t.  But there is a rational reason why equity markets outperform long-term.

The S&P, Dow Jones and Nasdaq, as an example. is just the biggest stocks in America.  The biggest firms though, change over time.  There is a survival of the fittest at play here.  With the exception of GE, no original company on the Dow Jones is still on it today.  The same thing applies to the UK FTSE100. It is just the 100 biggest firms in the UK, and the FTSE 250 is the biggest 250 firms in the UK.  

As we become more innovative, it gets harder and harder to get on the index and be one of the biggest firms in your country.  It was considered innovative 200 years ago to have invented a three wheeled car, after horseback went out of fashion.  These days, you might need to invent a car which is the most fuel efficient in history or can fly, to break into the top 100 companies in the US as a new company!

So the market is self cleaning.  Most businesspeople are confident about their own business growing, The same dynamic doesn’t exist for property or gold.  The supply of gold is quite stable, and demand goes up and down.  So it fluctuates, not losing or gaining a lot of value over long periods of time.  Ever the biggest gold bugs say gold is a good store of wealth, meaning it holds its value.  It does hold its value, but it doesn’t grow by much.

Housing has outperformed gold, especially since the 1980s, but the dynamic isn’t completely different.  Housing stock is relatively stable, unless a government decides to go on a huge house building program.  Demand is stable in smaller towns, and going up in big cities.  Long-term, the market can’t exist without first time buyers. As many first time buyers can’t buy now, there is only so far the market can go. 

So the conditions for growth exist in equities, which simply don’t for these assets.  If stocks are ever down over a 50 year period for the first time in history, moreover, then we are all in deep trouble.  No asset would be safe and democracy itself and the institutions we have gotten used to would be in trouble.  

This is because if stocks underperform for a short period of time, then sure other assets such as cash, gold or property can outperform without risking the whole system collapsing.    Stocks have underperformed before.  But the fact that the Institutions of the United States almost collapsed during the Great Recession, despite the fact that asset prices increased in real terms within a decade due to the deflation, should tell you what would happen if something much worse happened.  

Your property wouldn’t be safe from theft or confiscation if the economy was so bad in 2068 that the largest companies aren’t more efficient then than in 2018!  Your cash my not be worth much due to government efforts to stimulate this 50 year recession, and how much would government bonds be worth?

Barring a nuclear war or an absolute disaster, stocks will outperform other assets long-term.  If they don’t, we are all in trouble, and won’t gain from other assets if things ever got that bad.  

Reading Lists

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

I am often asked which investing books investors should read.  There are tones of academic works out there, but the following are good places to start:

Paul Farrell – The Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money

Burton Malkiel and Charles Ellis. The Elements of Investing

Larry Swedroe. The Only Guide to an Investment Strategy You’ll Ever Need

Larry Swedroe. The Quest For Alpha: The Holy Grail of Investing

John Bogle, The Little Book of Common Sense Investing : Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

William Bernstein. The Four Pillars of Investing: Lessons for Building a Winning Portfolio

John Bogle – Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

John Bogle’s “The Clash of the Cultures”

David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

Lawrence Cunningham. The Essays of Warren Buffett: Lessons for Corporate America, Second Edition

“Security Analysis” by Benjamin Graham

Benjamin Graham’s “Intelligent Investor.”

Carl Richards, The Behavior Gap, Simple Ways to Stop Doing Dumb Things with Your Money.

Thinking Fast and Slow, Daniel Kahneman

Extraordinary Popular Delusions and The Madness of Crowds, Charles Mackay.

The Essays of Warren Buffett 

 

For more academic work on how the 4% rule works in practice, I would recommend the following:

Sustainable Withdrawal Rates From Your Retirement Portfolio, by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz – http://afcpe.org/assets/pdf/vol1014.pdf

 

Other academic books to look at include:

 

Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning, 7(1), 171-180.

Bengen, W. P. (1996). Asset allocation for a lifetime.Journal of Financial Planning, 9(3), 58-67.

Bengen, W. P. (1997). Conserving client portfolio during retirement, part III. Journal of Financial Planning, 10(5), 84-97.

Bierwirth, L. (1994). Investing for retirement: using the past to model the future. Journal of Financial Planning, 7(1), 14-24.

Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). Retirement spending: choosing a sustainable withdrawal rate. Journal of the American Association of Individual Investors, 20(2), 16-21.

Ferguson, T. W. (1996). Endow yourself. Forbes, 157(12), 186-187.

Ho, K., Milevsky, M. & C. Robinson. (1994). Asset allocation, life expectancy, and shortfall. Financial Services Review., 3(2), 109-126.

Ibbotson Associates (1996). Stocks, bonds, bills, and inflation yearbook. Ibbotson Associates, Chicago, IL.

Ibbotson Associates (1998). Stocks, bonds, bills, and inflation yearbook (CD-ROM V ersion). Ibbotson Associates, Chicago, IL.

Lynch, P. (1995). Fear of crashing. Worth 2(1), 79-88. Scott, M. C., (1996). Assessing your portfolio allocation from a retiree’s point of view. Journal of the American

Association of Individual Investors. 18(8), 8-11.

 

For some non-investing books that I have found useful to understand human behavior, which indirectly affects investing choices and often leads to bad choices, I would suggest the following books:

Dale Carnegie, How to Win Friends and Influence People

Nassim Taleb, Fooled by Randomness 

Shaan Patel, Self Made Success 

Why real estate/property outperformance is a complete lie.

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

Ask the average investor a question. Which asset has performed best in the last decades and historically.  Most would say property.  It simply isn’t true.

The only way you can beat the markets with housing is by going down the leveraged buy-to-let route but that is highly risky.  If interest rates rise or tenants don’t pay, a buy-to-let landlord may become bankrupt.  

This evidence would surprise a lot of people.  Ask the typical person in the UK, US or Canada which investment has performed best, and most people would say property.  The evidence suggests otherwise.  

Let’s look at UK house prices.  According to the Land Registry in the UK (http://landregistry.data.gov.uk/) the average property was 55,000 Sterling in 1995, and is now at 225,000 Sterling in 2018, representing a 309% increase.  Even if we don’t factor in the costs of up-keeping the house, which can be huge, the returns are poor compared to markets.  In early 1995, the Dow Jones was sitting at $3,900, and was sitting at $26,616 in 2018, representing a rise of more than 6.5X.  

Once you factor in the lower costs of a stock portfolio and the costs of up keeping a house, which can be substantial if it is a new kitchen or something else which is a big cost, the difference in returns are even bigger.

It isn’t just US markets either. The German Dax was 2,100 in 1995, and almost hit 13,000 in 2018.  The UK FTSE 100 hasn’t performed as well as US or German markets or the FTSE250.  It was sitting at 2,900 in 1995, and was at 7,800 in 2018. 

How about `hot` property markets such as London or some markets in Canada? What we can see is the same pattern.  There are some years they outperform markets, and they have certainly performed better compared to housing in smaller cities, but they haven’t outperformed markets overall, once costs are accountant for.  

As the figures below show, even the super hot London market has slightly underperformed the US markets in common currency.  Once costs such as Stamp Duty (the UK tax for buying a house) and paying for repairs is taken into account, the US Index has outperformed London Housing.  

Type of Asset

1995

                 January 2018 Percentage Change not adjusting for costs of real estate
London House Price

107,590

739,297

+587% Sterling Profit
US Dow Jones Index                              $3,900                            $26,616 +582% USD Profit.  Over 600% Sterling profit.

That isn’t to say that housing can’t beat the markets over a 5, 10 or even 15 year period. The US is a prime example of this. In America, real estate prices increased by 56% between 1999 and 2004, whereas the S&P produced -6%. Over a 25 year period though, from the start of 1980 until 2004, home prices increased by 247% excluding the aforementioned costs, whereas the S&P increased by more than 1000%.  Even in the ten largest US cities, housing underperformed.  Since 2004, the housing crisis of 2007-2008 and subsequent strong equity market performance, the gap has widened

Canada has been one of the hottest property markets in the world.  If you ask the average Canadian or overseas investor, they would assume it had outperformed stock markets.  If we look at the prices of Canadian real estate from 1994 until 2016, we get the following results:

Asset class Price 1994 Price 2016 Percentage gain
Average selling price for detached house in Vancouver $368,800 $1,470,000  299%
S&P/TSX Composite Index $368,800 $2,006, 272

444%

US S&P 500 $368,800 $2,716,520

636%

It is human nature to be a bit egotistical and assume we know more than the average investor, and therefore can spot opportunities in the market.  I am sure there are some people reading this who have made 1000%+ percent on property.  

It is true that you can find properties that outperform the housing market and stock markets, in the same way you can find individual stocks, such as Amazon or Google, that have outperformed the general market.  Certainly many investors in bitcoin have felt smug recently as well!

This is a risky approach, however.  There are so many unknown unknowns and known unknowns, that it is close to impossible over a 40-50 year career to have a good chance to beat the market.  

The fact you can buy thousands of companies cheaply around the world on the stock markets indexes, is a much safer option than relying on 1-2 shares or 1-2 houses.  It sounds obvious, but the culturally ingrained nature of property makes many blind to this fact.  

Finally, let’s consider another factor.  There really isn’t as such thing as a good debt.  Debt is like a noose around your neck, which stops you retiring early or doing the things you want to do.  So even if you do well with leveraged property, those benefits will only come after a significant amount of time, mired in debt.

For anybody with multiple properties already, it makes a lot of sense to sell, and leave just 1 family home maximum. You may just be able to retire or semi-retire on a beach somewhere!

Getting money out of China 2017-2018

Please contact me at adamfayed@iamgltd.com . if you have any questions about this article or financial planning questions in general.  I have helped several individuals get money out of China quickly and hassle free.  This is especially the case if they have a Visa or MasterCard, but I have also managed to do it for people in other situations.  

Why do Expats and locals want to get money out of China?

One of the biggest issues expats in China face in 2017-2018 is getting money out of Mainland China.  Many expats come to China for relatively short term assignments, and few plan to stay for more than 10 years.  Even if they do, the majority do not want to contribute to a Chinese pension plan. 

Many Chinese returnees and other locals also face the same issues. With the trade war and a depreciating RMB, many local Chinese are also looking at ways to get RMB outside of China and into USD.

Indeed Bloomberg has reported on why so many people want to get money out of China, and the situation has become more and more apparent as 2018 draws to a close.

It is true that for relatively small amounts of money (less than 20,000RMB) it is possible to take it home with you without declaring it to customs on your next flight home.  Taking so much cash with you isn’t particularly safe though, and isn’t an option at all for larger amounts.

There are numerous ways you can send money out of China. This article will review some of the best options.

Is it sensible to delay with the trade war and other ongoing political issues?

With the current political climate, the RMB could fall much further.  Certainly most economist expect it to weaken further.  Besides, the banks in China give low interest rates like the rest of the world.  Leaving money in RMB in the bank is money to inflation and probably currency depreciation.

In 2018, several currencies have depreciated much more rapidly against the USD than the RMB, including in Turkey and various South American countries.  Nobody can know for sure what will happen in 2019 and the longer-term future, but a steep depreciation by the end of next year is a distinct possibility.

Already on October 31, the Chinese RMB to USD exchange rate was trading at 6.97, which is the weakest level since 2008.  If the Chinese Central Bank allows the RMB to depreciate past 7:1, a sharper depreciation may happen.  

Nobody knows the future. However, this uncertainty is probably one of the biggest reasons why the USD is strengthening in turbulent times.

Could the RMB recover?

Of course it could. It could even strengthen, but given the current situation, the overall trend seems downwards, especially against the USD.

Given that Trump’s election hopes partially ride on being `tough` on China, it is unlikely he will back down on the trade war, unless China gives considerable concessions. That seems unlikely, given rising nationalism in China.  

Getting money out of China Via Hong Kong

Some expats try to get RMB out of China through Hong Kong. However, some of the methods used to do so aren’t cost effective.  Time is also money, so taking a flight to Hong Kong from Shanghai, Shenyang or Beijing to get money out of China, doesn’t make any sense.

Even if you live in Shenzhen, going to HK will take a day.  Moreover, unless you have HKID, it isn’t always easy to open up a bank account. In which case you need to use a money changer, which doesn’t make any sense.  This is because you will be left with cash in your hand, and then you will still need to transfer the cash, and it isn’t easy or safe to change considerable amounts of money.  Assuming you are preaching the 20,000RMB allowance, you could also be stopped at customs using this method.  

Getting money out of China via Western Union

You could also send money out of China by Western Union.  One can see why this is an attractive option, because Western Union have branches even in small Chinese cities.  However, the fees and currency rates are terrible, meaning that you are often paying 7%-10% to send your money if you include the direct and indirect cost.

Western Union only charge $15-$30 for the transfer typically, but added to a bad currency rate, this a expensive option.  Companies similar to Western Union might say they are commission free, but the conversion rates are a killer.

Getting money out of China via Chinese Bank

Another way is via a bank account.  Banks in China typically have better currency rates than Western Union and their competitors in the West.   However, as a foreign-national, you often have a $500 per time limit.  This low limit, like Western Union, means it is also expensive, as even a $25 fee is 5% of the transfer, and then you have other small fees, such as the 1%-2% indirect currency charge.

If you have a close Chinese friend, they can send up to $50,000 a year to you.  By putting the money in their bank account, they can send money to you.  The ability to spend more money at once means the fees are lower.   As an example, if you send $10,000 per time, you may have a $30 one off bank fee.  Added to the 1%-2% exchange rate fee, indirectly it is costing you 1.3%-2.3%.  If you only send $2,000-$5,000, the charges could top 3%.

Ultimately, sending money to your home country isn’t always the best option and 1%-3% every time adds up.  Look at it this way.  If you are sending money home to contribute to a pension, you are paying 1%-3% before you add the fees for the investment.

Or another way to look at it is instead of investing $100,000, you may only have $97,000 to invest.  If your investments go up by 10%, that is the difference between $110,000 and $106,700!  Every year for 10 years, that really adds up – could be $50,000+ compounded.

That isn’t to mention there are certain ramifications of sending too much money home.  In the UK, as an example, you can only `​earn` 3,000 Sterling from gifts every year.  If you are using a Chinese friend to send money on your behalf, this may be considered a gift.  Even though they are essentially using your money, as you are just using them as a gateway to funnel your own money into the country, their name will appear as the sender.

Many banks automatically inform HMRC about any payments above 5,000 Sterling or any potential suspicious payments.  Even if you haven’t done anything wrong, too many payments from overseas gets flagged.  You may therefore need to prove you are really an expat, to avoid tax on the money.  Australians, Canadians and other expats face similar issues.

Sending money out of China via Bitcoin

It is possible to send money out of China using Bitcoin.  Needless to say, however, the highly volatile nature of bitcoin, which can fluctuate by 25% in a day, means that it shouldn’t be used to transfer money overseas.

Moreover, the Chinese Government is cracking down on Bitcoin payments.  In 2017, they banned Bitcoin exchanges, meaning it is difficult to buy and sell Bitcoin in RMB.

After the ban, some people have stated some peer-to-peer exchanges to get around the ban.The process isn’t easy, however, and the coins are still too volatile to use to exchange money.

Sending money out of China via PayPal 

PayPal is one of the oldest methods for sending money out of China. It is a viable option, but the fees are once again the big issue. There are also many processes involved here, like setting up a separate Chinese PayPal account.

This PayPal account should be linked to your Chinese bank account. You can then send money from your Chinese PayPal to your UK or US PayPal, although there are several steps you need to take to make this happen.

The total fees can be high because you are paying for the international transfer (typically 0.5%-2%) plus the currency conversion.

Sending money out via investing 

A better option is to invest overseas in USD, Euros or Pounds when you are living offshore.  In the same way that ISAs were originally designed for UK nationals living in the UK to save and invest in a tax efficient way, the UK overseas territories like the Isle of Man were originally designed to allow expats to invest whilst they live overseas.

Expats living overseas have options available to them from locations such as Hong Kong and the Isle of Man, which are much cheaper than other options they have, and especially cheaper than incurring the costs of sending money home via one of the aforementioned vehicles.

This is particularly a great option for expats who have Visa and other international cards, because often the premiums can be taken out from RMB and converted to USD or GBP. 

Another advantage of this option is speed. I have helped clients set up accounts in 48-72 hours, and all the documents can be done online.  


Property as a vehicle for getting money out of China 

Many Chinese and expats living in Mainland China are interested in property overseas property in the US, UK and many other countries.  

There are a few currency companies I am aware of that have excellent currency exchange rates, for people who are looking to send money out of China in a lump sum.

Given the fees involved, however, this option is only good for people who have 40,000GBP (about $55,000) or more to send as a lump sum. Using a currency company for monthly investments isn’t a viable option.

I have seen several people buy a property using this method to pay for a deposit on a house.

Getting money out of China for Chinese 

For returnee Chinese with foreign passports, it is often easy to get money out of the country.  Ultimately, China doesn’t allow joint passports.  So returnee Chinese with foreign passports are legally expats, even though they were born in China.

For local Chinese, as mentioned previously, it is possible to send $50,000 worth out of China in a lump sum mechanism.  All such accounts can be done online or via physical application forms, with some of the larger institutions that are available through brokers .

For Chinese people who want to invest more than $50,000, one of the most effective ways is to invest a further $500-$700 a month through a regular savings plan.

The reason why this is effective, is that the money is taken out of RMB and put into a USD account.  Therefore, it seems more like a bill payment, rather than an investment.  It is only when premiums become much higher, than the banks start asking questions and/or the credit or debit card limit has been reached.

With that being said, it is via easier to send money outside of China using Visa or MasterCard, than UnionPay.

The majority of Chinese sending money outside of China are middle-class consumers who have access to these international credit and debit cards.  

Some Chinese people are worried about their information automatically being shared with the Chinese tax authorities, and then rules being applied retrospectively.  In other words, in 2020 the laws are changed to only allow Chinese people to spend $40,000 overseas, and the Chinese authorities apply a retrospective tax to people who used the previously $50,000 allowance.  This is unlikely to be an issue, and some offshore US territories do not share tax information.  

As a final comment, I would say that the situation is different for businesses.  Companies that want to repatriate their capital outside of China can do it using various ways.  It also isn’t simple, but more options exist compared to those options available to individuals.