Core Financial Planning Rules for Internationals in Europe

I started writing this article by looking over the library of articles we have written in the past 7 years. One common theme over that time, and dare I say over the 25 years of my financial planning career, is that volatility is a constant. In other words, there is always something happening. In the moment, it might be making news headlines and seem important, and then in a few years it will be hard to recollect.

Therefore, a reminder of rules that apply across time when setting and managing your financial plan is useful.

In this article I discuss timeless rules for expats and international professionals when it comes to managing your financial plan and how you manage your money. Irrespective of the stage in the investment market cycle, where the economy is at, or the type of investments you are holding, these rules can apply to you and help you to remain on track.

1. Eyes on the prize- always refer to your ‘holistic’ financial plan

It helps to manage your responses to news and market volatility when you are clear on what you want to achieve and by when. A comprehensive financial plan sets out a roadmap for what is most important for you and how to get there. When we construct a financial plan for our clients, we take the approach we call objectives-based, meaning we are focused on your end goal. All recommendations including investments, pensions, portfolio composition, currency, jurisdiction, and structures are merely a means to an end. This means all ongoing analysis is focused on whether the existing plan remains relevant for you or what modifications need to be made. Importantly any changes or response are in relation to your goals, and not a reaction to news , market changes or hype.

The financial plan is central and all following points are contingent on having a good financial plan in place that is actively managed and regularly reviewed.

2. Diversify

Many people have a bias around what they are comfortable with or what may have worked in the past when it comes to managing investments. This can lead us to being too concentrated in one asset type, one particular investment or one market. As the saying goes, don’t put all your eggs in one basket. The technical rationale is called negative correlation. That means you should hold a mix of assets, so that if something happens to one part of your portfolio, your other assets won’t be as impacted. This leads to smoother and more consistent returns. Aim to hold a portfolio of assets that are diversified across types of assets, markets, currencies and risk levels, as appropriate for your specific circumstances.

 3. If it seems too good to be true, it probably is

A new investment opportunity can be appealing and some investors feel the pressures of not wanting to miss out, being enticed by promises of large returns. This is why we always apply this question as a test. It pays to apply critical thinking to new investment opportunities, especially ones that focus on large returns and/or that have limited detail about how they will generate the returns, or on who is behind the offer. It pays to be cautious. Once an opportunity has been assessed for credibility, it should be assessed against your financial plan: does it help you to achieve your objectives or not.

4. Market downturns can equal opportunities… but don’t try to time the market

We can often seek false safety in prior returns. Seeing an investment that has recently performed well can make it appear attractive. What it may mean though is that we are buying it at an expensive price, rather than when it is on sale. In that sense, market downturns can be a good opportunity to evaluate your investments and take the opportunity of buying in when markets are cheaper. Markets are always cyclical; the long term trend is up but it is not in a straight line. It is also a good idea therefore, to be cautious about selling when markets are falling. Remember though, in a link to point 7 below, that it is time in the market and not timing of the market that will generate the long-term returns that you want. Timing the market is difficult if not impossible, in fact in investment management academia there has been extensive research to support this, under the phrase the efficient market hypothesis.

5. Foundations before rooftops

Investing can be more interesting than the boring basics when it comes to putting a comprehensive financial plan in place, but the basics are fundamental and can provide the stability that allows your other investments to perform unimpeded by the distractions of short term personal needs. The foundations include having an emergency cash reserve in place, having appropriate insurances, and ensuring your estate planning is in order. Start with these foundations and then move onto investments. A financial plan is not just an investment recommendation. Investments are tools to implement the strategies to achieve your goals, but there are other equally important strategies that cover items like cash reserves, cash flow stability, and insurances where relevant.

6. Understand risk and return

Understanding risk and return is a critical point that overlaps several of the key points here. It is wise to remind yourself that there is a direct relationship between risk and return. That means, the higher the potential risk of an investment at a point in time, the larger the potential return in the long term. In addition, cumulative risk tends to reduce over time. This means, for example, the risk of a negative return over a day is much higher than the risk of a negative return over 10 years. It also means if you are seeking a return that is above the cash rate, a degree of risk must be applied. Risk can often be managed and reduced through diversification, but it cannot be eliminated. In relation to point 3 above, there is no such thing as a high return at low or no risk.

When assessing your financial plan, the movement of an investment from one day to the next is not as important as long term direction and whether you are on track with your financial plan. This is why regular reviews with your financial adviser is important.

7. Time is money

When you make an investment and are checking the performance, it is less important how that investment is doing over a week or a month, than how it is trending long term. If your goals are longer term so your focus should be as well- look to the medium to long term and not overnight successes. Long term returns are driven by time in the market as we state in point 4 above.

Time in the market allows compound interest, what Albert Einstein reputedly called the 8th wonder of the world, to perform its magic as your investment grows over time.

8. Look out for the hype

One of the important lessons we always remind people to be aware of market hype. This can be at the level of a specific stock, a market, a sector, or the whole economy. There are some phrases we advise you to look out for: “This time it’s different”; “The market/this stock is going to go up/ go down forever”; “Normal economic principles don’t apply to this investment”. When market commentators, the press, or even your friends make comments like this it is time to take notice. The best courses of action are often to either do nothing or do the exact opposite of what they are proclaiming. If in doubt speak with your adviser.

9. Be careful who you choose to manage your financial life

Engage independent qualified financial professionals.

There are two important factors to consider:

• One is to make sure you are speaking with a financial professional that is qualified, licensed, experienced and that has expertise in helping people like you.

• The second is that you are comfortable working with them. Make sure you find a firm that is right for you.

Working with the right financial planner can give you the structure, the support, peace of mind, and ultimately the ability to reach your goals. There is recent research that shows that getting professional financial advice adds to clients’ bottom lines and improves their wellbeing. The focus should be your personalised financial plan.

We highlight two areas of caution. The first is social media and the group called finfluencers. Regulators in Europe are working hard to minimise the damage they can cause. They are often not qualified and not regulated meaning they may not know what they are talking about and do not offer you the consumer regulatory protections. They have also been found to have conflicts of interest as they are promoting investments in which they have a commercial interest. If advice is being offered on a platform without a cost, it is wise to remember that they are probably not a charity and if you are not paying a fee for what they are saying, you may well be paying a hidden cost somewhere else.

The other area to exert caution is in the rapidly expanding sphere of AI. It is a very useful tool in many aspects of life, but has been found to be deficient in specific and tailored financial planning, has been found to misunderstand and wrongly apply tax and regulatory laws- which can be expensive for you- and they use historical and potentially out of date material for portfolio recommendations.

Get advice from a qualified human.   

10. Peace of mind

Make sure you take the time to understand your financial plan and that it is right for you. This is an ongoing process. You should aim to meet with your financial planner at least once a year to make sure your plan is on track, and that it is still in line with your goals, heading to where you want to go.

Understanding your plan, and making sure it is still right for you, can give you peace of mind and allow you to focus on the other parts of your life, and that can be an important contribution to your wellbeing. 

Remember these when you are assessing your finances or looking at new investment opportunities and if you would like a second opinion, an independent analysis or professional advice, speak with us at Black Swan Capital.