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The concept of managing one's money does not begin or end upon arriving in Israel. Issues of estate and tax planning assume new dimensions but, conceptually, the basic principles of investment planning are the same wherever you call home. This article is a brief primer intended to clear out some of those financial planning cobwebs in your head and help you get back on track, if you haven't done so already. If you have already organized your financial plan and investment strategy, then this article will make you feel good that you're way ahead of many investors out there. So, let's start.
Where to begin?
A top down approach is central to correct investing. This means lining up your financial goals, needs and time horizons first. Financial goals & needs include current portfolio income requirements; retirement planning; higher education funding for children; charitable gifting; etc.
Your time horizon will be important in determining what money target you will actually need to achieve. Longer term goals need to factor in inflation, or what is commonly called the erosion of buying power, as an element in even the most conservative of investment portfolios. Statistics indicate that, on average, an individual will need approximately 80% of his five-year pre-retirement net income, upon retiring. The monthly amount needs to be projected into the future value of that currency based on inflation assumptions.
What about wealth succession?
Estate planning is another important element to conceptually build your investment portfolio. If estate funds are dedicated to future generations or charities, for example, the nature of these investment may be quite different than investments designed to answer current financial planning issues. The use of trusts needs to be explored when dealing with larger estates. Trusts can provide a legal layer of protection over the basic will to fend off hostile claims against the estate. In the event of second marriages, a trust is an important vehicle protecting the wishes of parents to provide for children of the first marriage. For new immigrants, foreign trusts may have tax benefits if certain conditions are met.
How important is tax planning?
Proper tax planning translates into tax efficiency and can lead to significant savings and enhancement of your investment portfolio's performance. For example, new immigrants have certain capital gains and interest income exemptions that offer varying degrees of benefits. New immigrants may also be beneficiaries of established offshore trusts which, if they meet certain conditions, may provide a tax shelter from capital gains and income distributions occurring within the trust. Offshore insurance companies offer special policies, known as personal portfolio bonds, which may provide tax deferred growth while allowing for a broad selection of investments tailored for each policy holder's needs.
Funding retirement plans in Israel can offer substantial benefits. Whether self-employed or a wage earner, one should maximize the tax and savings benefits of these plans. Ultimately, it will be important to consult with a US-Israel tax adviser who fully understands the cross border implications of any tax strategy.
What about investments?
The approach to an investment portfolio should be top down. The order of investing should be geared to managing your risk level through first defining your time horizon and determining your percentage weighting of cash/cash equivalents, stocks, bonds etc., or asset allocation. The next step is to determine your global geographic distribution. Finally, the selection of underlying investments.
The objective of investing globally is to overcome the "home bias" (investing mostly in the home country's capital markets) of most local investment houses/advisers and benefit from superior returns on a risk-adjusted basis. Though the ability to identify the highest quality investments is important, research indicates that the returns you derive from your portfolio will be most greatly impacted by the efficiency of your portfolio's asset allocation.
How can I stay informed of local and international financial news?
There are many sources for financial news on the Internet. You can start with:
The New York Times Business Section:
The Financial Times Europe: http://www.ft.com/home/europe
The writer is the Global Investment Strategist at Tandem Capital
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