Saturday, May 13, 2006

An interesting financial question

Someone approached me the other day with an interesting financial quandry. I think I've analyzed it correctly, but it's worth writing down the question and the answer in case one of my readers points out an obvious flaw in my answer.

Q: I have a large amount of U.S. dollars to invest. I currently live and work in the U.S., but as I do not have a green card I do not know how long I would stay in this country or even want to be here. However, there is a significant chance that I might settle here in the long term. What should I do with my investments?

A: If this answer was something that would be resolvable in a year or so I'd just tell you to wait and see. But seeing that you're sitting on a pile of cash that you definitely will want to invest for retirement, I suggest that you build two portfolios: one in your home country and one here in the U.S. Within each portfolio you would perform your asset allocation essentially, each porfolio mirrors the other: the only difference is that one is denominated in U.S. dollars, and the other denominated in Euros.

The reason for the mirror'd accounts is that of paying round-trip costs. Let say you bought European investments in a Vanguard European Index Fund. The problem is that when you need to withdraw, you'll be paying two round-trip conversions, from Euros to U.S. dollars and back again. That's inefficient when you already have a European account and can directly trade a European index. You could also perform balancing between accounts. For instance, hold all US Equity in the American fund, and all European equity in the European account. Hold US Bonds in the American fund, and European bonds in the European account. Split your Asia-Pacific and Emerging market funds between both accounts. This ensures that you never pay round-trip conversions whenever you can help it.

You face some obvious problems: we know that there are low cost, efficient instruments in the U.S. for long term investments, such as the Vanguard Index Funds. I don't know if such instruments exist in Europe. You'll have to do your research and study the funds carefully. For instance, if an efficient International Fund is not available in Europe, you might be better off paying the round trip cost and holding everything in the U.S.
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