Moving money across the globe is a risky tactic
The situation of a reader may not seem relevant to many others. But there are lessons here for practically everyone.
“I have been working in New Zealand and have a bit less than a year to go before returning to the UK,” the reader writes.
“I have finally got round to transferring some funds to invest here — since the interest rate is much more favourable than in the UK. I have hesitated before because the NZ dollar was not favourable. Now that it has weakened, I’ll get more dollars for each pound sent over.
“I want to invest about $65,000 in something promising a reasonable return. I am prepared to take some risk. Obviously, the dollar could change by the time we leave, so we could make — or lose — something on the currency transfer.”
The reader goes on to say that I recently recommended index share funds, which seemed great.
“Ideally, I would like to have the money available for when we return to the UK, but I suppose it would not matter if it was tied up for 12 months. What would you recommend?”
Certainly not an index fund. More on that in a minute.
Firstly, while you’re prepared to take some risk, you’ve already taken a fair bit, moving money from country to country for just a short period.
You gained from the Kiwi dollar’s fall when you brought your money here. But what if it keeps falling? The “something” you might lose on the currency transfer back to the UK could more than wipe out the interest rate advantage.
Anyway, now that you have the money here, you have three options:
- Reduce the risk of currency loss by sending the money back to the UK now and investing it there.
You’ve already paid to move it here, but that’s a sunk cost. And you’ll have to pay to move it back at some point.
Your UK investment should depend on when you will ultimately spend the money. If that’s a long way off, you might well go into an index fund over there.
If you choose this option, you’ll curse me if the Kiwi happens to rise from now on against the pound. But you’ll love me if it keeps falling.
- Put it in the New Zealand bank that pays the highest term deposit rate, and hope the Kiwi rises, or at least falls no further.
If, instead, you invested in an index fund or other share fund, you might do really well. But there’s about a one in three chance over 12 months that you will lose money. Over five years, that falls to one in nine, and over 10 years, it’s one in about 75, which is much more acceptable.
Property is generally not as risky as shares. But you would have to get a mortgage, and borrowing to invest boosts risk. Given current high property prices, and the high costs of buying and selling property, a 12-month investment would be highly risky.
What about finance company deposits? There’s quite a risk of default, as recent events have shown. And with high-quality corporate bonds, you generally don’t get enough more than in bank term deposits to justify the entry and exit costs over just a year.
For one- or two-year investments, the bank term deposit — currently paying well above inflation — is king.
- Send half back to the UK, and invest half in NZ term deposits.
Whatever the Kiwi dollar does, half your money will gain and half will lose. Not a bad compromise.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.