Millionaire Expat - Andrew Hallam

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But over shorter time periods, the stock market is nuts.

      Adding to the difficulty of predicting stock market growth is the fact that emerging stock markets don't seem to follow the same rules. For example, everybody knows that China's economic growth has run circles around US growth for the past 20 years. But here's a trivia question to ask a friend. Knowing what you know now, if you went back 27 years in a time machine with $10,000 to invest, would you want to spread your money among 100 randomly selected Chinese stocks or 100 randomly selected US stocks?

      Such disparity between economic growth and stock market growth isn't prevalent just in China. Emerging markets (India, Thailand, Indonesia, etc.) have definitely benefited as villagers have migrated to cities, worked at better jobs, and spent higher wages. In some cases, their bathrooms were outhouses. Many of those same people now fart through silk. But shadier legal frameworks and poor corporate governance sometimes leave stains.

      While emerging‐market economic growth has run circles around US growth, the developed world's stock markets haven't been left behind.

      Don't, however, commit to believing US stocks will continue to win in the years or decades ahead. They might. But often, one time period's winner is the next time period's loser. Nobody knows which stock markets are going to do well this year or over the next decade. That's why smart investors are like the young gardener I mentioned at the beginning of this chapter. They sow every type of seed. They invest in a representation of the entire world's market so they don't get caught with their pants down when a sector takes off (or when a specific stock market sector falls off a cliff).

      Many people hire advisors to guess which investment sectors they think will do well. But speculating is silly, as I'll show in later chapters. Instead of rolling the dice with a soothsayer, trying to predict which market will outperform, it's better to diversify money across every sector at the lowest possible cost.

      Unfortunately, many global expatriates fail to do so. They chase whatever market has performed well lately (or over the past 15 years) to the detriment of everything else. And their retirements often pay the price.

      Investment portfolios composed of stocks and bonds are less volatile and more diversified than those made up solely of stocks. So they're safer. In the short term, investments get yanked about based on supply and demand. When demand for stocks is especially high (many more buyers than sellers), stocks rocket. But for stocks to rise so quickly, people would be buying them with abandon. Where do they get such money for their stock market purchases? Many pull proceeds from savings accounts, mattresses (if they're nuts), gold, real estate, and bonds. If enough money is pulled from gold, real estate, and bonds, these asset classes fall in price.

      Their supply would exceed their demand. When stocks are roaring, investors selling bonds can force bond prices to drop. Always remember that short‐term asset class movements are a result of supply and demand. If more people are selling bonds than buying, supply outweighs demand. So bond prices fall. If more people are buying bonds than selling, bond prices rise.

      You don't have to know the intricacies of how bonds work. Just make sure your portfolio includes a government bond index (which I'll explain later in the book). If, however, you want to know how bonds work, here it is in a nutshell.

      In this case, the yield is also 5 percent. Uncle James promises to pay you $500 annually. He pays it twice a year, $250 each time.

      At the end of the five‐year term, Uncle James will return the $10,000. You will have recouped the $10,000, plus earned $500 for every year your uncle held your money.

      But what if you had asked him to return the $10,000 before the end of the five‐year term? This is where Uncle James's quirkiness shines. He may decide to return just $9,800. Or he may give you a gift, handing over $10,300.

      Uncle James guarantees he'll return exactly what you give him only if he's able to hold the money for the duration agreed upon. If you want the money early, the strange duck might return more than you gave him, or less.

      Here's where Uncle James gets weirder. Assume that one year after you invested your initial $10,000 with him, your friend Amy wants in on the action. She approaches your uncle, who makes her a deal. “Amy, you can buy into the same scheme, but it expires in four years. This means you have only four years to earn interest, not five. I'm returning all of the money four years from now—yours (if you choose to invest) and my nephew's.” But bank interest rates have risen, so Amy starts wondering why she would invest with your uncle when the interest rate he promises is now lower than what she can earn elsewhere. “I'll tell you what,” says Uncle James. “If you invest just $9,500, I'll pay you $500 per year (equivalent to 5 percent of $10,000), but when the term expires in four years, I'll give you $10,000 instead of just the $9,500 you invested.”

      If bank interest rates had dropped instead, Uncle James would have done something different. Realizing what a great deal he was offering compared to the dropping interest rates of the banks, he would have told Amy, “You can invest in this scheme. You will receive a 5 percent coupon on $10,000 but it will cost you $10,500, not $10,000. Therefore, your yield would be 4.8 percent, not 5 percent, because I'll return less than what you invested. It would still be profitable, of course, because you would receive $500 per year. But

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