Do Your Investments Make Aliyah With You?

Do Your Investments Make Aliyah With You

Chances are that you put the question of your investments on the back burner when dealing with the many elements of your Aliyah. With immediate issues to address, your assets were safe to be left where they were. Your investments are your security. The result of possibly decades of hard work and they represent your plans for the future. But now that you are considering the issue, should your investments really stay in your home country? Will your move to Israel impact them, and what changes do you need to consider as you make the transition to a new country with new financial systems and investment considerations?

The path of least resistance is definitely to leave your assets and investments as they are currently set up in your home country. You understand the system, the language, the format and you might well have a good relationship with your financial advisor. Why not just leave your finances the way they are?

Assets in Israel vs Abroad

The short answer is you definitely need to rethink and re-plan your investment strategy whenever you relocate to a new country, especially if you are using a different currency. Most people worldwide have an investment bias towards the country they live in. If you live in Japan most of your investments tend to be in Japan in Yen, while if you live in UK your investments will largely be in the UK market in sterling. Explanations for this bias include familiarity with the local options, and fluency in the local language. But there are other significant elements that need to be considered including currency risk and the desire to improve one’s connection to the local market, interest rates and inflation.

If you are moving to Israel, it is likely that most of your expenses will be spent in shekels over your lifetime, so tying your investments to your local currency will help to avoid exchange rate risks and the associated costs. Your unique situation will dictate how much of your assets to invest in shekels as opposed to other currencies but having significant exposure to the local currency will reduce your long term exchange rate risk. If you anticipate future sources of income in foreign currencies (e.g., inheritances, social security payment, IRAs) then having a large amount of your savings denominated in shekels becomes even more important to balance the foreign currency income.

The Israeli Real Estate and Stock Market

There are two main investment options available in Israel:

  • Real estate – residential and/or commercial
  • Stock market-based investment portfolios

There has been a history of long-term real estate price appreciation in Israel which has averaged between 3-4% a year. However, the rent to value ratio (how much rent you can charge annually as a percentage of the value of the property) is relatively low, standing at 2-4%. While this range does not seem bad compared with our current almost zero-rate interest environment, these returns are comparatively low when viewed against similar residential return rates in other Western countries like the USA. While the Israeli real estate market has risen significantly over the last 12 years, it has plateaued and even gone down in value over the last two years. Anyone buying in now is likely doing so at the market’s peak with the double digits’ gain a thing of the past. Additionally, since most people don’t have easy access to a diversified real estate portfolio, creating a balanced portfolio is not a straightforward process for the average investor.

Stock and bond market investing in Israel are centered around the Tel Aviv Stock Exchange (TASE). The Israeli market has seen excellent long-term risk adjusted returns. The ongoing growth of the Israeli economy, the continued dominance of Israeli hi-tech companies, as well as the ability of the Israeli market and economy to avoid the major financial downturns that overwhelmed other countries are just a few contributing factors to its growth.

So where do you start? Investing in the TASE can be done in Israel through either your bank or a brokerage house that is a member of the TASE. If you plan to invest via your bank, they will connect you with one of their investment advisors who is allowed to give you advice on what to invest in, given your specific needs. However, you are responsible for all decisions and changes in your investment portfolio. While some branches reach out to their clients recommending changes in the portfolio, the average client will need to stay abreast of their investments in order to make changes.

The big difference between the banks and the brokerage houses is that the brokerage houses (and the independent portfolio managers who work with them) can manage your money for you. Brokerage houses have portfolio managers (Menahalei tikim) who, with their clients, define the desired risk level, goals of the investments, income needs and other specific needs and then make the investment decisions. While portfolio managers cost more than if you were to manage your own money, many investors see the huge advantage in working with them. Just like we hire professionals to fix our cars and monitor our health, many people feel more comfortable working with professionals to manage their money. Management fees, in many cases, can be significantly less than investing in mutual funds, and the transaction costs and holding fees that they charge can be significantly cheaper. Independent portfolio managers have the flexibility to manage your money, whether it is held at your local bank or with a brokerage house.

Americans investing in foreign markets need to be aware of US tax issues including PFIC (passive foreign investment corporation) complications and should consult their account or investment advisor to avoid costly mistakes (see for a more comprehensive discussion of recent changes in the Israeli investment options open to Americans).

Currency and Retirement Issues

Investment options play a big part in this equation and can influence where and in what currency you hold your investments. But I believe that even if large parts of your portfolio are held abroad in foreign currencies, you still need to ensure that you have significant resources available in shekels in order to avoid a situation where you are forced to convert currency immediately at unfavorable rates. With the ever-tightening and restrictive money laundering regulations, it is becoming increasingly difficult to rely on the ability to move funds quickly should you need them urgently. It is thus crucial that at least your emergency funds are in the country where you will likely need them.

And whereas this is very true for your day-to-day expenses, it is even more crucial as your retirement approaches. You don’t want to be hostage to large currency fluctuations when you need to start accessing your savings to fund your retirement in Israel. Your retirement plan should include how and when you plan to transfer money from abroad to Israel, especially if you hold large amounts of your savings abroad or you are receiving a large amount of your income in foreign currencies.

If you decide to keep your assets in your country of origin, it is vital that you remain aware of the financial developments and changes there. Legislation regarding tax changes and their possible impact on your financial setup must be considered (US President Trump’s tax reform being an example as ex-pat business owners were significantly impacted). Make sure that you and/or the financial professional you are working with are assessing the ramifications of all changes and their potential bearing on your financial situation.

The whole issue of foreign currency is multi-faceted and highly complex. To read my article about foreign currency risk on the Nefesh B’Nefesh site, click here.

There’s no getting away from the fact that the whole subject of investments and currency risk as they apply to the multi-national is incredibly complicated and must be handled properly to ensure your long-term financial stability. If you aren’t comfortable with exchange rate optimization and tax effective investment plans being your new Aliyah side career, then speak to the relevant professionals. It may have been okay to ignore these decisions when overwhelmed by the many immediate issues related to your move to Israel, but there’s too much at stake to ignore them long-term. Behatzlacha!

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