According to recent articles from Bloomberg, more Americans than ever are considering moving to Europe, with France one of the leading destinations. Some are doing it because retiring there appears more affordable, for political reasons, or just because they’d like to snap a 2nd home.
The recent decline in the value of the Euro against the US dollar is also one of the contributing factors to this newfound interest in moving across the Atlantic. In the past 12 months, euro-denominated assets and the cost of living in European countries got 15% cheaper for Americans.
We encourage anyone seriously considering such a move to read first our prior pieces “Four Financial Planning Issues to Consider Before Moving to France” and “Retirement Accounts: Your Alternatives When Moving to France.”
Today, we will discuss the home country bias and currency risks.
According to many sources, American investors today hold 70% to 75% of their stock portfolios in US-based companies. This compares to a share within the global worldwide market in the 55% to 60% range depending on the index:
This imbalance is even worse when one considers that stocks only constitute a portion of someone’s total assets. Most investors also own real estate and fixed income securities overwhelmingly denominated in US dollars. This is what home country bias is, the propensity to overweight exposure to domestic investments. It is not surprising as people tend to invest in what they’re more familiar with.
Investing in The US Has Paid Off, but Will It Last?
If you’re one of these American citizens or residents considering moving to Europe, the home country bias within your portfolio has recently paid off handsomely. Your domestic market has outperformed for the better part of the past decade, and the dollar has been strong recently.
However, currency volatility works both ways. Historically, the greenback suffered multi-year periods of depreciation against foreign currencies such as the Euro, the British Pound, or the Japanese Yen, and will again do so in the future.
A portfolio invested mainly in US securities could cost you dearly if you live in Europe during such periods of dollar weakness. Your spending is in Euros, a currency that would increase in value while your assets and income would decline. This is usually compounded by the fact that American retirees receive their pensions and social security benefits in dollars.
Therefore, reducing the home country bias in your portfolio is vital as you prepare to move because doing so helps mitigate the currency risk. This is accomplished by progressively shifting the composition of your portfolio towards non-US dollar-denominated securities.
We are not advocating a complete exclusion or severe reduction of dollar-based investments. We remain confident that America will continue to provide satisfactory returns for decades. US financial markets retain structural advantages, making them attractive to investors: low transaction costs, a wide selection of investments, and more disclosures than most foreign markets.
The appropriate allocation between US and Euro assets depends on multiple issues: how many months a year one spends in Europe, existing liabilities, the overall mix between stocks, bonds, and real estate, and additional sources of income (pensions, social security benefits, annuities, rents, etc.) that are available other than interest and dividends, etc.
So, consider reviewing your portfolio’s country allocation years before you move to France, Portugal, or Italy. A globally diversified portfolio is more likely to deliver a secure retirement with less currency risk.
PLANNING TO MOVE SOON?
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