You have probably grown up hearing the idiom, “Don’t place all your eggs in one basket.” While financial experts will give you countless reasons why diversification is a smart move, it all boils down to that one classic saying.
The reality is that concentrating all of your wealth in one location is risky, even if you think you are playing it safe. One of the best ways to diversify your assets is through offshore investing.
Identifying the Risk of Currency Devaluation
One of the biggest financial risks an investor can encounter is currency deflation. When the currency rate falls below zero percent, then you are dealing with what is known as a negative inflation rate. This reduces the purchasing power of the currency. In the United States, there is a Consumer Price Index, or CPI, that helps evaluate and analyze inflation or deflation rates.
The devaluation of a currency might seem like a good thing in the very short term, because the cost of consumer products can possibly go down. However, it often signals an economic dip or even a collapse. No one can completely protect themselves against banking instability or the collapse of an entire industry or economy. However, there are ways to limit losses.
The best way to fight back against the risk of currency devaluation or even hyperinflation is by investing offshore. This spreads your wealth and your holdings across multiple jurisdictions. In the process, it also lessens your chance of getting caught up in an economic collapse. While worldwide economic crises can and do happen, it is more common for one country or region to suffer more than others. If your money is invested across banks in multiple parts of the world, then you will always have a financial safety net in place.
Choosing the Right Geographic Diversification
Clearly, diversification is a key part of wealth and asset management. Geographic diversification is critical, but it isn’t enough to diversify. You also need to be aware of where you are diversifying to and what each destination has to offer. Not all destinations are the same, and each has something unique to provide investors. The right combination of investment jurisdictions will require investors to consider tax, currency, and stability, among other factors.
One of the mistakes some investors make is considering geographic diversity to be a numbers game. In theory, it is helpful to spread your assets across as many different jurisdictions as possible. In practice, however, that isn’t always feasible. Therefore, it is more important to consider the location. If one nation offers plenty of financial privacy and investor anonymity, and another offers incredibly low tax rates, then choosing both is a savvy option.
Some countries can promise economic stability and a secure, democratic form of government. These countries, like Belize, offer an extra level of security. In addition to spreading around your wealth, you can rest assured that your investments are protected.
Asset Protection on a Global Scale
Diversification is important because it can reduce financial vulnerability. That refers to the volatility of the stock markets and real estate prices, but it also means your own personal or business vulnerability. Even individuals who closely adhere to the letter of the law might find themselves in legal situations where their assets could be seized or frozen. This can happen for personal reasons like bankruptcy or divorce, or it could happen because of business activities or mass lawsuits.
Whatever the reasons for legal action, it puts your assets in jeopardy. Even if you have done nothing wrong, you could be without access to your financial holdings for an extended period of time. By spreading your financial assets across more than one jurisdiction, however, you can limit that risk.
In Belize, for example, your assets are protected by the government. Even if a particular government requests access to your accounts or tries to seize assets, you will be protected. This can provide incredible peace of mind for private individuals who may feel targeted because of their wealth.
Risk vs. Vulnerability
Risk and vulnerability are two words that are often used interchangeably in the world of finance and international investments. However, they are not the same. It is a mistake to assume that risk and vulnerability are identical. For many investors, risk is a choice. When you take on higher risk, then you can increase your chance of reward. A portfolio with a high level of risk is a conscious decision and part of a greater financial strategy.
Vulnerability, on the other hand, isn’t a choice. It isn’t part of a proven strategy, and it won’t necessarily increase your likelihood of financial gain. Vulnerability is a problem, a weakness, and a hole in your safety net. It is something that needs to be addressed, because vulnerabilities leave your portfolio open to erosion or devaluation.
Fortunately, a lot of vulnerability is caused by concentrated wealth. If you are investing heavily in one industry, a financial expert would tell you to diversify. If you are only investing in one nation, or in one region of the world, then the same advice applies.
If it is still risk that you are after, and you like to make bold financial moves, then you can explore countless global investments opportunities. By getting rid of vulnerability, you will have more wiggle room to explore high-risk investments, or you can focus on stable, low-risk opportunities for you and your loved ones.
If you want to diversify your assets, then you are already on the right track. While there are many ways to reduce vulnerability, one of the most effective is to invest offshore. Geographic diversity through international investing can offer tax and privacy benefits along with increased safety and asset protection.
Luigi Wewege is the Senior Vice President of Belize-based Caye International Bank, a FinTech School Instructor, and the published author of The Digital Banking Revolution. You can follow his posts on trends shaping the financial services industry on Twitter: @luigiwewege