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When making Aliyah, one of the more critical areas to examine and, if necessary, change is your investment portfolio. Whether you hold money in a retirement savings plan, an investment account, or other investment vehicle, or whether you own mutual funds, exchange traded funds, or stocks and bonds, it’s important to evaluate your holdings and your financial relationships for a number of reasons.
Your tax exposure on investments in your home country may be affected by your residency status. In many situations, you should plan to take advantage of your changing tax status to ensure that your investments are being taxed at the lowest rates possible both currently and in the future. See “Tax Planning,” for a more extensive discussion of some of the tax implications affecting your investments.
Another major issue for Americans investing in Israel is how they invest their money. Technically, Americans are allowed to invest in mutual funds in Israel and throughout the world. However, it is often prohibitive from a tax planning perspective as many tax professionals consider them to be PFICs (Passive Foreign Investment Corporations). Therefore, tax professionals tend to highly recommend not investing in foreign mutual funds as taxes on gains can be very high – sometimes as high as 60-80%. However, this doesn’t prevent investors from putting together investment portfolios at local financial institutions consisting of stocks, bonds and other securities. Investors can independently construct and manage such a portfolio or choose to work with professionals, including Israeli licensed portfolio managers, to ensure they are investing in the appropriate assets for their individual situation. Some Israeli banks, unfamiliar with US tax reporting, have unintentionally purchased mutual funds for many US clients placing them in an unenviable situation. If you own Israeli mutual funds, seek professional counsel.
It is becoming increasingly difficult to administer your assets from abroad. Post–9/11 banking regulations make asset management much more complicated if you’re unable to walk into the local branch of your bank. Transfers above a certain sum of money often require your physical presence. Many US banks have asked non-residents to close their accounts or move their activity to different management teams within the bank.
These often reflect local bias in their asset allocation. It’s a natural phenomenon that local investment managers prefer local investment funds, denominated in the local currency, with an emphasis on local stocks. Home bias in investment management is a well-documented phenomenon for which there are rational explanations and often good reasons. However, when considering a move away from your home country, consider making changes in your investment portfolio to reflect your new location, currency, and international exposure.
Working with a local Israeli bank, financial planner, or investment manager may be much easier than trying to manage your assets abroad. Having personal contact and face-to-face meetings can provide a significant impetus to changing the location of your assets.
As part of your Aliyah preparation, ensure that you have all your bank and investment accounts set up for internet activity and phone communication approvals. Find out what types of restrictions might still remain in effect and evaluate how these restrictions could impact you. If your bank won’t approve bank transfers above certain limits, plan how to access your money from Israel in the event that you need to transfer large sums of money. Check writing is an option — but there are sometimes significantly higher costs associated with checks. Consider giving signing authority in your bank account or a power of attorney to a trusted friend or relative.
You might want to consider setting up a new account or multiple accounts prior to making Aliyah. While it’s possible to open bank and investment accounts once you leave many countries, it is much more complicated so if this is necessary, consider opening an account before you leave.
No matter what your banking setup is prior to Aliyah, prepare for changes after Aliyah. Often accounts registered as belonging to expatriates are transferred to new departments, so you risk losing that treasured personal relationship with your local banker.
In fact, setting up new professional relationships is a critical part of the pre–Aliyah preparatory phase and your transitional period into Israeli society. Finding trusted professionals such as bankers, lawyers, accountants, and investment managers who speak your language (literally and figuratively) can help smooth your financial absorption. Local professionals with experience in the local market as well as in your home country can help you to successfully merge and/or transfer your financial world to a new country without major bumps along the way. Although some new olim recount nightmare stories about their financial integration into Israel, this is largely due to not having found the right professionals to help them through the process.
However, often you risk losing more than just a personal relationship with your local banker. For example, over the last few years, more and more banks have become less helpful to non-resident Americans.
The increasingly complex regulatory environment in the US has led many banks to close their doors to non-residents or to limit the nature of banking activity that is allowed. One example has seen American banks and brokerage houses send letters to non-residents forbidding them from purchasing mutual funds. Sales of mutual funds are regulated by state law and since non-residents are obviously not resident in any state they are being prevented from purchasing them.
In Israel, the most significant recent development in the banking system has been the implementation of US FATCA legislation by Israeli banks and the recent criminal admission by major Israeli banks regarding helping Americans to avoid tax in the USA. This admission will increase the penalty applicable for Americans with unreported foreign financial accounts at those banks. See your accountant or tax lawyer immediately if you have unreported foreign accounts.
FATCA legislation has required financial institutions around the world to start reporting American account holders. Israeli banks have asked US citizens and foreign residents with accounts in Israel to sign a W9 form indicating their US tax status. Many banks have required all international clients (both resident and non-resident in Israel) to sign declarations that they are compliant in their home country (meaning that they have reported all their income and assets as required by the tax authority in their country of origin). Non-residents in general are currently not able to open investment accounts with most banks although they still have the option of opening accounts with the brokerage houses.
If until now your asset portfolio has been centered in your home country’s market, you may be unfamiliar with the Israeli investment scene. Often described as “an economic miracle,” Israel has become an increasingly attractive investment option.
Although English-speaking olim have had a tremendously positive impact on the Israeli economy — from influencing the business culture to working and investing in hi-tech and entrepreneurial ventures — one area in which many Anglo olim are underrepresented is the Israeli stock and bond market — the Tel Aviv Stock Exchange (TASE) or, as it’s known colloquially, the Boursa. It’s a well-known phenomenon that when English speakers make Aliyah they tend to leave their money in their home country, which is often a major mistake. This lack of monetary Aliyah is due to familiarity with the investment setup in their home country as well as the lack of familiarity with the Israeli investment scene and lack of comfort with the Hebrew language. I see this often at seminars that I give, where audiences need extensive instruction about virtually all the elements of investing in Israel.
The following is a quick overview to help you begin to understand the Israeli investment market. Recent years testify to this market’s outstanding performance. The ongoing growth of the Israeli economy, the continued dominance of Israeli hi-tech companies, and the ability of the Israeli market and economy to avoid the major financial blunders that overwhelmed other countries in the 2008 recession are just some factors contributing to its upward curve. The long-term prospects for the Israeli economy and the stock market remain bright.
While past performance does not necessarily predict future performance, there are some compelling reasons for investors (especially olim) to invest in Israel. The Israeli market continues to maintain its strong positions, recovering from the drastic drop caused by Covid-19. The hi-tech market continues to generate huge sales, as the economy displays strong fundamentals even as Israel, along with most of the world, continues to be battered by the financial demands caused by Covid-19. Indicators suggest that it will continue its significant performance in the long run, with the Israeli economy displaying strong fundamentals even as the world economy slows down. Israel’s economy does not suffer from many of the systemic financial problems facing other markets, although like most countries the financial price of the coronavirus has created a huge deficit. The banking sector remains stable with a very risk-averse lending culture and no subprime mortgage issues to speak of. So, although Israel is dependent on and correlated with other world markets, it has more reason to anticipate long-term continued performance gains, especially compared with other Western markets.
While geopolitical risk in Israel is high, Israel nonetheless was upgraded from an emerging market to a developed market in May 2010. Even Warren Buffett, one of the world’s most famous investors, was quoted as saying after his purchase of Israeli company Iscar in 2006, “We live in a dangerous world as it is, and in the long term the risk premium in Israel will not be different from the US’s.”
For conservative investors looking for safe options, over the last few decades Israeli government bonds have proven to be one of the best places in the world for secure investment. With bank deposit rates remaining extremely low, the bond market provides a higher return alternative without compromising on security. For those looking for higher returns and willing to take increased risk, the Israeli corporate bond market provides good opportunities for long-term growth.
New olim and/or veteran Israelis expecting to retire in Israel or marry off their kids should match the currency of their future revenue sources (for example, from fixed income and pension sources) with their future expenses, which will be predominately in shekels. In other words, prudent financial planning means that future expenditure and revenue sources should be in the same currency to reduce the risk of currency fluctuation. Investing in shekels eliminates the potential currency risk and decreased buying power that multinational citizens can be exposed to, when the majority of one’s assets are in foreign currencies. This risk has come to the forefront in recent years as the Israeli shekel continues to be one of the world’s strongest currencies. Investing in Israel allows this goal to be accomplished and reduces many of the costs involved in managing one’s assets abroad.
While modern technology allows money to be accessed electronically from almost anywhere, post–September 11 financial markets are subject to many more controls and restrictions than ever before. These regulations that restrict capital flow often hamper efficient transfer of assets. Having at least a percentage of your assets invested locally gives you immediate access to your money in times of emergency.
There are no hard-and-fast rules regarding what percentage of your portfolio should be in Israel. However, investing in Israel should be on every new immigrant’s radar.
So where do you start? Investing in the TASE (Tel Aviv Stock Exchange) can be done in Israel through your bank or through a brokerage house that is a member of the TASE.
Investing in the TASE via a bank requires opening a separate investment account at the bank. This can be done prior to Aliyah, but often the process will be simpler after making Aliyah. This new account will appear on your bank’s website access, together with your current account.
When you invest through your bank, you must approve all transactions in the account. Banks employ licensed investment advisors who are allowed to give you investment advice based on your specific needs. However, the decision — and responsibility — is ultimately yours, and you’ll sign a document attesting to this. Clients must approve of all changes in the composition of their investment portfolio. While some branches proactively reach out to their clients, recommending occasional changes in their portfolio, this is rare. Most clients should stay abreast of market developments in order to make changes as time goes by.
Banks do not charge for their investment advice — they are compensated by charging higher fees in other areas. However, there are two fees connected to each investment account: a transaction fee per purchase or sale of a security, and a holding fee (d’mei shemirah) for holding your investments in the bank. Transaction costs can range from 0.1% to upwards of 0.8% of the value of the asset. The holding fee varies greatly between banks and between customers, usually from 0.2–0.8%. This range of fees is huge, and can make a real difference to your bottom line. The banking system in Israel is akin to a shuk (a Middle Eastern marketplace) — be prepared to bargain with your bank to get the best rate possible.
Banks also sell mutual funds which are managed by the brokerage houses and investment management companies. There are a great variety of mutual funds that are managed by local investment houses investing in a wide range of assets, investment styles, and risk levels. While there are no upfront transaction fees to acquire mutual funds (unlike stocks and bonds), they have an assortment of built-in fees that are not visible to most investors. Management fees generally range from 0.5–3% — higher than those charged elsewhere in the Western world. Clients are responsible for monitoring the performance of the funds, as there is no obligation for the banks to send you a prospectus or to update you about changes.
Banks do not have the ability to manage your portfolio directly because, as mentioned earlier, you must approve all transactions in the account. Banks can only employ licensed investment advisors to give you investment advice based on your specific needs. However, independent portfolio managers (menahalei tikim) do have the ability to manage your account at the bank (and at the brokerage houses). Portfolio managers, who can work either independently or for the brokerage houses (they operate physically outside of the banks), are paid to manage your money. They partner with you to define your desired risk level, investment goals, income requirements, and other specific needs, and are then given the responsibility of making the investment decisions. This is the main difference between working with independent portfolio managers and standard bank investment portfolios as described above. Banks do not and cannot make any decisions for you. Portfolio managers can and do. Although you must pay a portfolio manager for a service that you could do yourself, many seasoned investors choose to work with portfolio managers for the same reasons that they employ independent professionals to help them in almost all other aspects of their lives — from car maintenance to personal health issues. It’s easier to pay an expert to manage your money than to become an expert. Sometimes investors feel they can follow the investment news for a few hours a week and make better financial decisions than professionals who devote all their time and energy to the field. If you wouldn’t do it in other areas of your life, why do it with your investments?
Advantages of working with independent portfolio managers are numerous (full disclosure — I work as an Israeli-licensed portfolio manager). Their management fees are usually significantly less than the sums involved in investing in mutual funds, and they often offer lower transaction costs due to the volume trading discounts they are entitled to. Furthermore, independent portfolio managers have the flexibility to manage your money, whether it’s held at your local bank or at a brokerage house. They work exclusively for you and personalize your portfolio after spending significant amounts of time with you and familiarizing themselves with your specific needs. And since their fees are often less than the cost of investing in mutual funds, you receive a personalized service at no extra cost.
Brokerage houses provide another direct avenue for investing in Israel. They operate similarly to banks in that you can hold and manage your assets (including mutual funds and individual securities) through them.
However, unlike banks that can only offer investment advice, brokerage houses (and the independent portfolio managers who work with them) have the ability to manage your money for you directly. There are several advantages to working with brokerage houses. They often charge substantially lower transaction costs and holding fees than those charged by banks, and generally offer easy web access and phone support. On the other hand, they do not have branches across the country like most banks do (this can be important to clients who prefer the convenience and security of being able to walk into a bank branch at any time).
Note that brokerage houses are highly regulated and fully insured in Israel, and thus are considered very safe and secure. There is no legal distinction between holding assets with the banks or the large brokerage houses that are members of the Tel Aviv Stock Exchange, as both institutions are required to record the assets in your name with the stock exchange.
Investing in Israel can be an important component of Aliyah. Don’t be intimidated. Work out your requirements, and don’t be shy about asking questions. It isn’t so difficult — with a little research and the help of qualified professionals, Israeli investments can contribute to your future financial security.
How often have you wondered what to with your savings from the old country? Keep your investments abroad or move them to Israel? Should they be converted and invested in shekels or kept in dollars, pounds or euros? How quickly should you convert your money – all at once or over a long period of time?
These questions are among the most common that I am frequently asked. And as with most financial issues that I confront, there is no one answer that fits all. So how do you go about making a complicated decision that can have enormous long term implications?
Here are some points to consider and apply to your personal situation.
Israel has unique financial constraints and opportunities. Everyone’s finances need to be customized to their new country, and for most people that includes increasing your exposure to the local currency. Keeping savings in the local currency helps to reduce exchange rate risk as you save and invest in the currency that you spend the majority of your money. That’s why there is a local investment bias (i.e. people place the majority of their funds in local investments – stocks and bonds etc.) in most countries around the world.
With the dollar depreciating against the shekel it’s hard not to ponder what to do with one’s foreign currency savings. Is this a good time to convert or should you wait? My feeling is that it’s generally impossible to time the currency market and thus you can’t expect to always receive the top rate for your dollars. Instead look at long term trends and your short and long term needs, and assess what you feel is a reasonable long term rate for converting. Be realistic and avoid the temptation to be greedy. When your currency reaches the level you have chosen, start converting. So if, for example, you view 3.4 NIS to the dollar as generally above the multi-year averages, don’t wait. Lock in your gains and don’t look back.
Ensure that you are cognizant of the relevant tax implications of your decision. If you have savings in a retirement savings account, taking them out to convert to shekels might trigger a large tax bill. Selling a business or a home could also lead to large tax exposure, so plan appropriately. If you feel you lack the knowledge to make an educated decision consider consulting with your financial planner or accountant before taking any significant financial step to avoid unplanned tax exposure.
When deciding how much and when to convert your money to shekels, it’s important to see where this money fits into your long-term cash flow. If these savings are the only money you’re ever likely to earn in a foreign currency, then the money you have abroad should possibly not be converted as you want to diversify beyond the shekels that represent your income and savings. If you are retiring in Israel and your retirement income is completely dollar based, then convert a larger percentage of your savings into shekels now.
Having money close by has become increasingly important to people over the years. International financial regulations are becoming increasingly stringent. Depositing and investing money locally can simplify your life and help you avoid situations where you aren’t able to access your money abroad for any one of many possible reasons. This ease of access becomes more important as you age and want to simplify your finances.
Consider your unique circumstances. Are you expecting any future inheritances coming from abroad? If so, it might be less necessary to keep your money in a foreign currency.
There might be specific reasons why you want to keep your money at a distance and not bring it into the country. Money control issues between spouses, family members (close and more distant) might influence your decision. For some, keeping funds further away will prevent easy access to the money while for others the close proximity is beneficial.
Have you ever noticed how the average holders of foreign currencies tend to clutch on to their dollars, pounds or francs as they rise in value against the shekel (NIS), and only think about converting their foreign currency into shekels when the shekel is gaining in leaps in bounds? Instinctively we tend to think, “wow! It has already gone up 15% this year, maybe it will go up another 15%”. This mistaken analysis leads many people to do exactly the opposite of what successful money managers do – sell high and buy low. When the dollar sinks to an exchange rate approaching 3.2 NIS to the US dollar, everyone starts selling dollars but when the dollar recovers and rises to a rate above 3.7 NIS, no one wants to convert. Hmmm – something seems wrong here.
I want to qualify the remaining analysis with the following caveat: I cannot (nor do I believe that the average person can) predict the value of the Israeli currency in either the short or long term. I can provide my own opinions and arguments in favor of this way or that, but ultimately the international currency markets are highly volatile, and I have seen incredibly experienced and successful currency traders lose 80% of their money overnight. Instead of trying to anticipate where currencies are headed, the average person should focus on one simple principle. During times of currency strength, hedge your bets and convert your money when your currency is strong. During times of currency weakness, don’t panic – stay put. Most major currencies fluctuate tremendously over time and there are enough significant movements to allow you opportunities to follow the rule above.
Most olim continue to have a financial connection with their former country and its currency and financial system. This might take the form of foreign currency monthly pensions and social insurance payments, or investments in their former country. People in those situations are therefore exposed to risk, related to the strength of their former local currency. But what are they to do as their monthly expenses are mostly in shekels, and they need to convert their money periodically into that currency. Many people are able to bring over money periodically and this flexibility allows them to follow the rule – sell when your currency is strong and have patience when it’s not. Not only will it reduce your currency risk, but it will provide you with the opportunity of locking in gains which is a surefire method for making money rather than losing it. So while you always risk losing out on future gains, you also prevent yourself from losing your current gains if a sudden correction materializes.
Is this always a surefire way to get the best possible rate, the highest value during the current month or quarter? No! Hitting the top on a consistent basis is nearly impossible. But to reduce your risk and lock in fluctuating gains, you don’t need to hit the top. You need to plan ahead and lock in gains at reasonable rates, when those opportunities arise.
So the next time you see the dollar jumping up, look at your assets and your future cash flow needs and evaluate whether this might be a good time to realize some gains and convert your money into shekels. Planning ahead and not holding out for that extra strong currency leap will reduce your overall risk exposure and lock in gains leaving you well ahead in the long run.
If, after considering the above points you recognize a need to convert your foreign currency, you must have realistic expectations regarding the conversion rate. There are huge risks involved when dealing with currency rates, and whereas getting a good rate may not be as enticing as getting a great rate – it’s infinitely better than getting a worse rate!
Unfortunately, money management mistakes are quite common. Some people don’t pay attention to their investments, others pay too much attention to popular media suggestions, and others fall prey to the masters of deception and treachery who inhabit the financial world. These are just a few types of catastrophic mistakes that people can make when managing their money.
That being said, many of the most common mistakes stem from ignoring a central money management concept: diversification. Diversification is considered by many to be rule #1 in financial management. It means not placing all your eggs in one basket — even if you’ve found a once-in-a-lifetime opportunity. Why? Simply put, there is no guaranteed way to invest or even store your money or other financial assets. Even cash and bank deposits have their own element of risk. Many people have lost their hard-earned savings in what they considered to be an ultra-conservative savings account.
Diversification allows you to reduce the risk level in your portfolio by spreading your risk among different investments. Studies have revealed that investors who have diversified portfolios generally see more reliable and constant returns on their investments than people who do not diversify their investments. As long as your investments are not highly correlated with each other, even if one investment is performing poorly, other investments may counterbalance and neutralize the risk. In some circumstances, increased diversification can even increase your returns — but the main reason is to minimize risk.
There are many different ways to diversify assets. The most traditional method of diversification is through different asset classes, for example stocks, bonds, commodities, and real estate. A well-diversified portfolio will even hold assets that might currently be unpopular because sometimes the conventional wisdom turns out to be wrong. By definition, unexpected events (i.e., black swans) arrive exactly when they’re not anticipated, and it’s wise to invest in assets that offer added protection against unanticipated trends. Consider also diversifying into various currencies. Prior to the establishment of the euro, Europeans were accustomed to making active decisions regarding which currency to hold their savings in, moving between various European banks and currencies to maximize their returns. Most people in the West, however, have gotten used to thinking almost exclusively in their home currency. Israel, however, is a true international country with large imports and exports to all the major world currencies. Israelis have traditionally bought their appliances in euros, their cereal in pounds, their cars in yen, and their military equipment in dollars. While olim should increasingly think about their assets in shekels in order to match future shekel expenses, diversification into other currencies (including gold, which acts as a currency and inflationary hedge) can be a critical part of any financial plan.
Diversification also means keeping some of your assets in liquid cash. The Talmud Tractate Bava Metzia 42a mentions that one should divide one’s assets into three main asset classes: real estate, business (including stocks), and cash. Cash not only reduces exposure to certain types of risk, but also provides liquidity to pursue other investment opportunities as they arrive.
The bottom line is that your diversified investment portfolio must be coordinated with your risk assessment plan. Whereas taking too much risk is always a danger, taking too little risk can also leave you with insufficient money for retirement, or those big things you want in life. If you’re fortunate enough to be able to save large amounts of money monthly, by earning much more than you spend, you may be able to avoid risk completely in building your investment portfolio. Most investors are not that lucky. They not only need to save money consistently over the course of their working career, but also need to get their money working for them.
If you feel that tucking your savings away safely will suffice for your retirement, you need to change this mindset. The sobering reality is that inflation alone will erode your purchasing power. Even a relatively low inflation rate of 3% will halve your purchasing power over twenty-four years. That means, in nominal terms, you will need to earn double the amount you earn today to avoid a loss in buying power. If you’re in your forties living on NIS 12,000 of income a month, you’ll need NIS 24,000 available to you each month of retirement in order to support yourself at your current standard of living.
Keeping a well-balanced and diversified portfolio helps avoid the next big crash by keeping you on even footing. Creating a balance is critical, and proper diversification can help you to avoid some of those major mistakes that investors unfortunately make.
Use your move to Israel as an opportunity to reevaluate your investment portfolio and ensure that it’s structured to meet your needs and risk profile. Don’t rush the decision-making process. Your portfolio should be the result of detailed research and advice, in keeping with your short- and long-term requirements. Asset allocation and diversification are two of the most important keys to the long-term growth of your portfolio, and they will provide the basis of your stable yet profitable financial strategy. Whether you research the market yourself or take advice from a trusted investment manager, the bottom line should be a diverse portfolio that reflects your needs and temperament. The actual percentage breakdown of share allocation versus bonds, real estate, or other financial assets will be highly dependent on your desired risk element, which might change during the Aliyah process.
Dollar cost averaging can be a helpful pointer in structuring your portfolio. It allows an investor to reduce risk by investing small amounts over a long period of time, similar to the keren hishtalmut or retirement saving plans. The investment amount remains the same regardless of the price of the shares. So even when the market declines, you have an increased chance of successful investment as you consistently invest through down markets, when prices are lower, giving you a greater potential long-term gain.
Once you’ve carefully thought through your needs and adjusted your portfolio to reflect them — stick with it! While nothing is carved in stone, make changes only after cool introspection over a substantial period of time and level-headed discussion with your investment manager. Your diversified portfolio means that when some areas are not showing the desired results, other areas are. Investors lose money when they repeatedly rush to pull out of what they view as “bad” investments and buy into “good” ones, not giving time for the bad to become good.
Over the long term, consistent investment choices — rather than buying and selling whenever the market changes — are most likely to show a profitable return.
Benjamin Graham, financial genius and mentor to Warren Buffett (among others), wrote that “the investor’s chief problem — and even his worst enemy — is likely to be himself.” He noted that even when investors have a good stock strategy, they often lose money because they can’t stick to it. Consistently following a single, coherent strategy is of vital importance.
The media today is constantly bombarding us with information, and it’s very hard to filter out the facts we really need to know. While it is crucial to stay informed, the popular media’s financial information usually offers a short-term perspective and much of it is misleading, contradictory, or just plain wrong. Keep focused on your specific portfolio and overall financial needs. Break down the information you need into pertinent facts, which might include those regarding funds you are interested in and information about tax laws that are relevant to you — these small things can make a big difference.
Fraud, bankruptcy, lost assets, legal proceedings, attempts to recover lost or stolen assets. The stories keep occurring. Unfortunately, the loss of ordinary people’s hard-earned assets is not uncommon. Making decisions about where to keep your money isn’t easy — especially when you move to a new country, a new financial system, or even new asset management strategies. Simple, risk-free decisions can blow up in your face. Whether discussing the collapse of Lehman Brothers or Madoff ’s investment scam, numerous scandals, bankruptcies, and frauds, investing is not a game. Perhaps all you really want is to protect your savings, but there is always some form of risk attached. Even the most conservative investors are exposed to some level of risk.
Let’s go over some different forms of asset risk in order to help you avoid the type of risk that you’re not interested in taking.
Holding your money in cash under your mattress (or balatot — Israeli floor tiles) has obvious risks such as fire, theft, or loss. Yet there are other risks: your money is worth less and less as inflation erodes its value. Note that bank safety deposit boxes are not common in Israel — make sure that your valuables are insured and that their valuations are up-to-date.
The lowest level of risk is sovereign risk. Investments in large, stable countries carry less risk than other options, but don’t be lulled into a false sense of security — they have risk as well. Countries that today are viewed as stable can change overnight into major credit risks. Even the United States is not a risk-free investment currently, with deficit and debt levels hitting record heights. While there are no guarantees, olim should realize that Israeli government bonds have consistently produced steady returns (and never defaulted), and Israel’s credit rating continues to rise in recent years as economic stability and growth prevail, despite the current pandemic.
The major risk when money is deposited with a bank is bank default. In the United States, the FDIC (Federal Deposit Insurance Corporation) insures deposits in banks (currently up to $250,000 per depositor, per bank). Despite that, in recent years, more than one hundred American banks have gone bankrupt each year, causing tremendous losses to thousands of people. And as we live in a global village, when large international banks go bankrupt (as happened in Iceland in 2008), people around the world who have deposits there lose everything.
The large Israeli banks have been very stable since the banking crisis of the 1980s, when they were nationalized by the government, preventing losses to the average citizen. While Israel has no formal deposit insurance, its large banks are implicitly backed by the government as the oligopolistic structure of the banking system in Israel (with only five or six major players controlling more than 90% of the banking industry) makes the failure of any of the large banks untenable. Because the banks hold the majority of Israeli savings deposits and support Israeli industrial and import/export activity around the world, most analysts consider them to be businesses that are too big to fail and would almost certainly be nationalized if they encountered problems. Furthermore, the Israeli regulatory environment is incredibly tight, with the financial sector in Israel ensuring the Israeli banks remain strong and safe.
This represents a far higher level of risk (as well as the potential for greater returns). Approximately 30% of new businesses flourish, offering innovation and a good return on investments. Yet the other roughly 70% fail, taking with them all the savings that people entrusted in their enterprises.
Investing in private businesses can be accomplished through buying stock in a business (whether it is publicly traded or not). Large businesses that are publicly traded generally have less risk than small businesses. Note that large businesses can also go bankrupt, as we’ve seen with countless recent examples (e.g. Lehman Brothers).
Small businesses usually have more intrinsic risk. Generally, they have fewer financial resources at their disposal, and they have much lower regulatory oversight, giving the investor less information about what is actually happening to his or her investment. Israeli businesses are highly sought out around the world because Israel has a thriving entrepreneurial and venture capital environment that provides many opportunities for investment. That being said, due diligence is always necessary before entering into a relationship.
Currency exchange providers (i.e., money changers) have been a welcome addition to the Israeli foreign currency marketplace. They can be very user-friendly, and in addition to their lower fees one can avoid the bureaucracy associated with the more rigid banks. However, an important caveat to benefiting from these services is that they aren’t guaranteed. If you deposit your money with a small business that goes bankrupt, you’ll have to fight (possibly a losing battle) to get your money back. Similarly, transferring money — even temporarily — to what is essentially a small business entails risk. Despite their advantages, all change places are ultimately just small businesses with all the inherent risks.
Some investments are made directly with your bank or brokerage house, and some are not. Madoff-type accounts, where your money is held by your advisor and not an independent custodian, carry a higher level of risk than accounts that are held by a private custodian, where you are the only person who can withdraw money from your account. While there are many solid investments around the world that require you to deposit your money into an account held by your advisor or fund manager, keeping your investments with an independent custodian certainly provides added security. If you are unclear as to how your investment is being held and what level of risk you are taking, consult with a professional in the field.
Who hasn’t been tempted by the thought of being part of the next biggest, greatest financial thing – the opportunity to effortlessly and speedily double, triple or quadruple your money overnight? And yet, unfortunately, everyone is familiar with someone who has suffered the opposite result: those seemingly savvy and intelligent individuals who sadly ended up losing not only potential profit, but also their entire investment. Victims of investment fraud!
So how does it happen? Why do people continually fall victim to these scenarios? Why have I seen too many cases of individuals who have lost large sums of money to sophisticated and non-sophisticated investment schemes? While no one reason can completely encapsulate the terribly rampant investment fraud that our world faces, there are a few basic reasons why we fall into the trap of trying to make easy money.
1. The simple answer is that practically our whole culture is based on immediate results – whether it’s via the microwave or instant messaging, we want immediate, positive results. When we find someone promising or guaranteeing us fantastic returns, we convince ourselves that maybe this might just be our train to riches, and thus allow our heart to lead our head in making bad investment decisions.
2. International integration and our technical prowess has given us access to investments around the globe, with people and organizations that only a few decades ago would have been beyond our possible contact. But this shrinking investment landscape has also led to increased complexity in the investment world, whereby most private investors are unable to truly understand the risk and reward elements of their investments and instead rely on trust. Trusting the salesperson, trusting your accountant, lawyer, family or community member to recommend a specific person or investment has replaced our necessary due diligence when selecting our investments.
But it’s time to change our perspective to ensure that we don’t fall prey where so many have fallen, because easy money is a fallacy. Beyond lottery winners (who are few and far between statistically, and cannot be considered to be real ‘investors’) there are very few free lunches out there. Making money, whether it’s through a business or via investments, is neither simple nor easy to achieve.
Let’s internalize the following rules in order to remain grounded in reality. While you may well have heard or thought about most all of them in the past, if everyone would live their lives accordingly when making investment decisions, few would have lost or be losing fortunes at this very moment.
1. Retain a high level of skepticism. Cynicism and skepticism are welcome attributes when it comes to assessing financial offerings. Don’t be too easily-convinced about the merits of an investment just because someone presents the facts as a given truth.
2. Ensure financial transparency in all monetary dealings. It should be very clear to all involved how everyone is making money, who is being compensated, by how much and when. (The good news is that the Israeli system has a much higher level of transparency than the US system.)
3. Don’t invest in anything you don’t understand. If your financial advisor cannot clarify the situation sufficiently for you, either s/he or the package are not right for you.
4. Complicated financial jargon is often used to hide something unpalatable – in the hope that the client won’t want to sound silly when s/he questions what is being said. Don’t be afraid to sound stupid. There’s nothing stupid about trying to protect your assets.
5. Be wary of affinity fraud. Our natural tendency is to believe everything we hear from someone we trust, or go with whoever is recommended by someone we trust. And if that person recommends an amazing tip or opportunity, why doubt them? Affinity fraud is probably the most common fraud affecting the Jewish community as we rely greatly on our network of connections. Skepticism should be applied to everyone and everything related to finances including one’s friends and their connections. If they don’t like the questions being asked and get defensive, then turn around and walk. Due diligence is standard and anyone who rejects these inquiries might just be hiding something unpalatable behind a cloak of secrecy.
Don’t get me wrong. There are certainly ways to make your money work for you. The skill is in ensuring that you are part of a legitimate investment that provides proper risk/return benefits that fit into your greater investment plan and your best interests. If you can’t evaluate the merits of the investment independently, then seek guidance from independent financial professionals who can help you make the proper decisions. And of course don’t forget common sense. Sometimes if it sounds too good to be true, then probably it is …
Understanding the above points about risk should be an empowering, not debilitating, experience. Proper investing can protect — and help grow — your nest egg. Assess your finances. Work out your short- and long-term financial requirements, and decide how much risk you can afford to take. Factor in your personality. How much risk can your blood pressure take?
Do the analysis yourself or get financial advice, and decide how to spread out your investments. Make decisions based on educated deliberation rather than uninformed decisions. Finally, remember that there’s no such thing as a sure thing. Stay far away from anyone who guarantees you high returns at low risk levels.
Assess your current investment portfolio in light of your upcoming move to Israel, taking into account tax considerations and the difficulties and cost involved in long-distance fund management.
Research the Israeli financial markets. They will become increasingly relevant with your move to Israel, and thus should be reflected within your investment portfolio.
Research and take advice from professionals to ensure your portfolio is sufficiently diversified.
Verify that the risk element in your plan reflects your desired risk level. Familiarize yourself with different risk elements available and act accordingly.
Formulate your investment strategy based on educated decisions. Stick to your plan — don’t let the media convince you to make quick changes.
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