For Americans abroad, investing can be especially complicated. In addition to the usual asset-allocation calculus, expatriate Americans must consider the consequences of two tax systems each of them likely to apply different rules to earned and investment income, capital gains and pension savings - and two currencies, the dollar and whatever they pay their bills in at the moment.

A good way for American expats to organize their assets, said Trevor Greetham, a global equity strategist at Merrill Lynch & Co., is to divide them into long-term money expected to be used in the distant future in the United States, such as for retirement, and funds likely to be needed sooner in their adopted countries.

A large proportion of the longer-term money should be kept in the kinds of assets that tend to perform better than others over the long haul, albeit with greater volatility, such as stocks and long-term bonds, especially those denominated in dollars.

"If investing for the long term, the most important thing for an American is to have lots of assets in U.S. dollars," Mr. Greetham said. "If it's long-term capital, they don't want to take on too large a currency risk. That nest egg is meant to be there when they return to the States."

Most of the short-term money, however, is best left in the currency of the country of residence. "It should be weighted to the currency you're working in because you're more likely to want to spend it," he said, citing home-buying and school fees as typical expenses. For the same reason, "that money would have a bigger weighting in short-term assets like cash and short-term bonds."

The amounts kept in dollars and other currencies depend on how long an expatriate plans to stay in his new country, said Bill Blevins, head of Blackstone Franks, an international financial adviser in London.

Employees on short-term foreign postings run the risk of returning home with large amounts of cash and investments denominated in a foreign currency that has fallen in value against the dollar. The risk is especially great in the developing world, where foreign-exchange rates are subject to violent movements.

An expatriate must always consider tax consequences before deploying money abroad, said Michael Rendell, an international tax specialist for PricewaterhouseCoopers. "Some Asian countries only tax residents on their local income," he said. Any dividends, interest and capital gains accrue free of tax, although there is a potential liability to U.S. tax.

That also holds in some European countries, such as Britain, which does not tax resident foreigners' investment income unless it is imported into the country, but not others, such as Germany. Fortunately, treaties with the United States exist to ensure that the same income is not taxed twice.

"Most European countries tax residents on their worldwide income," Mr. Rendell said. "Some don't tax capital gains, some do. Generic, simple rules are fine, but individual cases are going to require considerable thought."

No matter how particular revenue authorities treat foreigners, he added, taxes should not drive investment decisions.

Those decisions can be plain or fancy. For expatriates with small sums to put into action, Mr. Blevins suggested "a simple, well-diversified international fund," reasoning that "you wouldn't want to spread your money around too many investments."

Mr. Greetham of Merrill Lynch said that an American expatriate planning to return home for good one day should allocate assets just as any other American. Merrill Lynch's recommended weightings these days are 40 percent in stocks, 55 percent in bonds and the rest in cash, a relatively weak endorsement for equities. Of the portion reserved for stocks, 65 percent should be kept in the United States and the rest invested abroad, with no favoritism shown to the country or region of residence, he said.

Looking only at the chunk devoted to markets outside the United States, Europe would receive just over half, with the biggest investment going to Britain, which is Europe's largest stock market, and France, which Merrill overweights relative to the size of its market.

The firm recommends an additional 19 percent for Asia and 11 percent for emerging markets. A small amount of the equity portfolio is left as cash awaiting investment.

While the equity portion of this portfolio is heavily invested in American companies, Merrill's global equity portfolio, for investors with looser ties to the United States, is comparatively underweight in the U.S. market. U.S. stocks merit only 37 percent, compared with a weighting of 46 percent based on the size of the market. Europe is allotted 33 percent, compared with a 28 percent neutral weighting.

Source:  International Herald Tribune, By Conrad de Aenlle, January 2, 1999

Maxim is a premier wealth advisor for American expatriates residing outside of the United States. We are specialists in comprehensive wealth strategies involving investment management, tax strategies and financial consulting. We created our Knowledge Library in order to help expats increase their financial intelligence and to enable well-informed decisions. We hope you find this information useful and we invite you to contact us for more information on our wealth management services.