It is said that ‘Fifty Shades of Grey’ has changed opinions on locking things up for pleasure. We’d argue that many financial advisers in China have been doing this for years. In this case, locking up their client’s money. In our opinion, lack of liquidity is one of the biggest problems with some of the most widely sold investment products for expatriates in China. By ‘liquidity’, we mean the ability to get cash when you want. Of course, you’ll be told that this lack of liquidity is “for your own benefit” or “not something you really need for retirement”.
We beg to differ.
Now don’t get us wrong. There are times when limited access to your money makes sense when investing. Those times are when the assets you hold aren’t liquid. To be clear, those asset classes are real property (as in houses or shopping malls) or private equity and venture capital. Shares or bonds of companies traded on the world’s great stock exchanges on the other hand are among the most liquid assets available. Funds investing in those things are usually daily traded – as they should be. So why are you locking your money up in a complicated structure to access these funds?
It’s not you, it’s me.
Your investment money gets locked up, since only if it’s captive, can it be charged over time and pay back the commissions paid up front to the adviser on day one. There, we said it. The investment product providers aren’t fools. They know that the only thing that motivates many advisers (the other guys) is the big commission check up front, so they pay that way and collect charges over time to get their money back. They also know that people change their minds about investments, particularly when the returns turn out to be average at best. So they lock up your money to protect themselves and ensure they charge those commissions back. It’s not personal, just business.
Forget the Envy.
There are real reasons to avoid lock-ups beyond paying back your adviser’s commissions. After all, advisers do have a right to eat. Still, you need to think of yourself first of all, and here are our big reasons why we avoid lock-ups when investing in equity and bond funds (and whenever possible).
1. The future is unknowable.
The last century saw plagues, a financial crisis that still dwarfs today’s, two world wars and a cold one plus numerous other ructions like the inflation of the 1970’s. Predicting the future is a great way to look stupid.
For you own life it can be easy to assume a life of predictability like calm excel spreadsheets of money accumulation.
Companies suddenly merge or die all the time. Look at Kodak which used to be one of the most respected companies around not too long back. Or Lehman Brothers or dozens of others.
A career setback almost always happens unexpectedly and being committed to making contributions for the next decade, or even the next couple of years, carries a real risk.
2. Opportunities go to those who have cash
In late 2008 my wife and I were apartment hunting. We visited a place in Shimao Riveria in Lujiazui on the 42nd floor all marble and killer views of the Bund. At 13 million RMB it seemed fully valued, so we passed. Barely 3 weeks later the agent called us back. Apparently the owner, a factory owner from Wenzhou was cash strapped – his overseas customers had stopped paying during the financial crisis and he had 80 staff to pay. We were offered the same apartment for 5 million RMB but it had to be a cash deal done within 5 days. We weren’t liquid enough with money tied up overseas, so we had to pass on an absolute bargain. Someone else more liquid got that bargain. Now that apartment is probably worth in the vicinity of 20 million RMB, which is around 400% in about 4 years.
Those with the cash get the opportunities – that’s how the patient rich, get richer over time. Times of stress will come again (hopefully not too soon) and when they do, the prepared and ready will reap the gains. Locking your money up for the next 20 years is a good way to avoid those great opportunities. As we write Warren Buffett is patiently sitting on $40 billion in cash, just waiting and biding his time ready to act. You should have the same flexibility to act.
3. Tax laws can (and will) change.
If few can predict the future, even less can guarantee it. But that’s what you are hoping when you invest for the next 20-30 years in a limited access product. Tax laws do change and who is to say those products might suffer tax discrimination from your home country? If they do, you still won’t be able to change strategy – you are locked in. A sitting duck.
With government debts and big budget deficits governments will start getting more creative about where to find some punitive taxes. One or two countries have changed their laws, copying the Americans when it comes to taxing offshore vehicles (we will write about this in the coming weeks). Many countries, particularly in Europe with their debt situation, can’t be far away either. Don’t get locked into a strategy that you can’t change. It could be an expensive decision for a long time.
4. There are liquid investment platforms out there.
One of the best kept secrets is brokerage accounts in Hong Kong. Just buy funds traded on exchanges (called ETFs) and you can invest in share or bond based funds, globally, but still have your money back in days if you get an opportunity too good to pass up. We will explain this more in subsequent blogs.
Keep your money out of chains.
In summary – if the asset is traded every day, then you should have the same level of access. Any less and you are locking up your money to the mercy of others. Leave the bondage discussion to your wife’s book club reading of ‘Fifty Shades of Grey’ and keep your money out of it.