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Green Peak Advisors

I’m an American in Israel – What should I do?

US-Tax Payer Considerations

As a US taxpayer, I would say there are 2 major considerations to consider when it comes to investing overseas, and they both relate to tax:

(1) Investing in foreign funds – the “PFIC” issue and its filing requirements, which are complex and costly
(2) The challenge of reporting investments to the IRS from a foreign brokerage/bank account

There is no question that, as US taxpayers, managing one’s money in the US is the easiest solution. The IRS has encouraged this by enacting harsh tax regulations on investing through foreign funds which are considered PFICs. One can buy US-listed funds with ease, and online brokerage platforms are very user friendly with competitive transaction costs, especially when compared to the Israeli options that exist. On top of that, reporting is simplified, as one receives an organized and clear year-end 1099 report.

Benefits of Maintaining your Investments in Israel

That beings said, here are a couple of reasons why you should consider keeping your investments local (if possible). One is from an investment perspective and the other relates to practical and efficiency considerations.

Firstly, from an investment perspective, it just makes sense to keep ones investments mostly in Shekels. If the center of your life is here, you earn and spend Shekels, and you plan to retire in Israel, it doesn’t make sense to maintain most of your investments pegged to a different currency. You should strive to have as much local currency exposure as possible. Look at the following 5-year chart for the USD/ILS to get a sense of the volatility of these currencies — it’s no straight line!

To take a rather extreme, yet simple example (all approximate numbers). If you bought an index fund SPY which tracks the return of the S&P 500 in USD on December 31st 2014 when the exchange rate was approximately 3.89, and you held it for three years, selling it on December 31st 2017, when the exchange rate was approximately 3.47. In USD terms, the total return on your investment was approximately 38% over those three years! That is a great overall return. However, the USD weakened against the ILS in those three years by nearly 11%. So, in actuality, in ILS terms, you only made about about 23% on this investment!!

I will put it in real money terms to drive my point home. Let’s say you invested around $200,000 into this fund. Instead of having around $76,000 in gains, you now are left with $46,000! That is really significant for most people. Literally $30,000 in gains vanished because you kept your exposure to the USD. At the end of the day you live in Israel, so you should be thinking in Shekel terms. You could say, “Oh, but the currency could have gone the other way and I would have now made even more on this investment!” To this I would reply, “What is your goal here? To invest in stocks or speculate on currencies?”

The Volatility of the Israeli Shekel

Many of us have experienced this first-hand when trying to buy a property in Israel and our assets are in dollars. Yes, some people were lucky to convert at an attractive rate, but many of us, that was not always the case. Imagine the same buying scenario as the fund example, just with a house, without taking into account a rise in property values over the three-year period. The house cost 2.5 million shekels. In USD terms, in December 2014 the house cost $643,000 and in 2017 it cost $721,000. Again, this is without taking into account capital appreciation in home prices! Your dollars were worth nearly $80,000 more in 2014 than in 2017. Currency exposure matters!
I mentioned the word “luck” above. Why should we want to attribute a significant amount of our investment success to “luck?” In the case of the S&P 500 fund, if you were hedged properly, you wouldn’t have lost nearly 40% of your return on “luck!”

An additional and major point to consider relates to taxes. Take the example of the fund where you made 38% in USD terms and 23% in ILS terms. The IRS doesn’t care that you made 23% in ILS terms! The IRS will tax you on the 38% capital gain. So, not only have you “lost” a significant amount of money in ILS terms, but you will also be liable to pay a larger proportion of taxes on your gain.

Also, think about recent extreme examples of currency volatility – like “Brexit” which occurred in June 2016. I know countless individuals that had investments in GBPs and their base currency was USD. Literally overnight, those investments went down in value by nearly 20% in USD terms. This was not related to the actual investment; it was attributed to the unfortunate set of events which caused this volatility in the currency. Geopolitical risks are always out there, and macro-economic changes are always occurring, affecting both markets and currencies.

So, shouldn’t we try and neutralize these risks if possible?

I am not saying that it doesn’t make sense to maintain some currency diversification in one’s portfolio. That being said, to be responsible investors, we should look carefully at how our portfolios really are positioned – not just from an asset allocation perspective, but also from a currency exposure viewpoint. It is not usually worth taking unnecessary and speculative risks that are completely out of our control.

Therefore, my view is that we need to consider maintaining as much ILS exposure within our investments as we can taking into account the limitations we face as US-expats.

The Benefits of Shekel Investments

And to my second point – for those that earn income in Israel and in Shekels. It is a huge hassle and can be a costly endeavor to convert and send money back to the US to deploy into brokerage or robo-advisor accounts. It is also inefficient. You can end up being out of the markets for longer amounts of time, so you are under-invested. Also, if you just want to invest small sums at a time, typically you won’t want to convert those smaller sums and send them back every month. So, in the end, you may wait to send a more significant amount back. Again, this strategy is both inefficient and exposes you to the risk of not being invested during this time period.

Talk to the experts at Green Peak Advisors about options for local and overseas investments to suit U.S. expatriates living in Israel – contact us today! Speak to us about how to achieve more ILS exposure in your investment portfolio!