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IN THE SPOTLIGHT
Why International Teachers Love Index Funds
By Andrew Hallam 16-Mar-16
Reams of international teachers are aware of something dark. Those working overseas for long periods of time may not reap the benefits of their home country social programs when they retire. American expats, for example, won’t earn full Social Security benefits. Depending on their time overseas, they many not qualify for any government money. That’s why more international teachers have learned about best investment practices. Yes, there is such a thing. It’s something that the leaders at Google chose to teach more than 11 years ago. In August 2004, Google shares were about to go public on the stock exchange for the very first time. Hundreds of young Google employees were about to become automatic multi-millionaires. Financial advisors from a variety of U.S. firms started to knock on Google’s door. But the firm’s senior vice president, Jonathan Rosenberg, wouldn’t let them in. Instead, he made them wait. He wanted to protect his staff. To do so, he needed to educate them. Company founders Sergey Brin, Larry Page, and CEO Eric Schmidt agreed. They invited experts to speak to Google’s staff, including Bill Sharpe, an economic Nobel Prize winner. They also invited Burton Malkiel, the legendary Princeton economics professor and author of A Random Walk Down Wall Street. Now in its 11th edition, it may be history’s highest-selling investment book. To top it off, Google executives also invited John Bogle. Fortune magazine named him one of the four investment giants of the 20th century. Their message was clear. The financial service reps that were circling Google wanted one thing: fees and commissions for themselves and their firms. Each guru told Google’s staff to invest their money in index funds. Warren Buffett, the world’s greatest investor, agrees. Thanks to the Internet and a strong desire to learn, international teachers have been catching on fast. Building a portfolio of index funds takes less than one hour a year. You don’t have to watch the stock market or read the economic news. But study after study says you’ll thump the returns of most finance professionals. That’s because most advisors sell products that are layered with fees. The term “index” refers to a collection of something. Think of a collection of key words at the back of a book, representing the book’s content. An index fund is much the same: a collection of stocks representing the content in a given market. For example, a total U.S. stock market index is a collection of stocks compiled to represent the entire U.S. market. If a single index fund comprised every U.S. stock, for example, and nobody traded those shares back and forth (thus avoiding transaction costs) then the profits for investors in the index fund would perfectly match the return of the U.S. stock market before fees. Fees are as low as 0.04 percent per year. Teachers mired in an offshore pension pay between 3 and 4 percent per year in fees. In other words, those international teachers pay up to 100 times more. If global markets earned 8 percent next year, teachers paying 4 percent in annual hidden fees would be giving away half of their profits to fees. It’s worse if the markets make 4 percent or less. Many teachers, in offshore pensions, wouldn’t gain a penny. Portfolios of index funds are simple. Americans could split their portfolios in thirds, between a U.S. stock index, an international stock index, and a bond index. Teachers of other nationalities could do something similar. Canadians, for example, would own a Canadian stock index, an international stock index, and a bond index. Australians could own an Australian index, an international stock index, and a bond index for stability. To see why reams of international teachers now invest with index funds, go online. Download an academic study on such products. Buy a book on index funds off Amazon. Use the Internet to see what Warren Buffett recommends, and why. See if you can find a peer-reviewed study saying that actively managed portfolios (such as those sold by most expat advisors) stand a snowball’s chance in Bangkok of beating a portfolio of index funds over time. Everything you read will actually say the opposite. Financial service firms such as Alexander Beard, Friends Provident, Zurich International, Generali, Royal London 360, and Raymond James used to have a monopoly on teachers’ money. But the revolution has begun. International teachers are spreading the word about best practices—just like the folks at Google. Andrew Hallam is the author of the bestseller Millionaire Teacher.
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