Is Owning the S&P 500 Enough Diversification?

Interview with Jill Schlesinger

Is it fair for the U.S. government to tax its citizens, who are living abroad? And should these citizens keep their money in the U.S. or should they move it? Are we living in a vastly different economic world today than we were a few years ago? Jill Schlesinger shares her thoughts on the above questions and more.

Douglas Goldstein: We are very excited to have on, The Goldstein on Gelt Show, Jill Schlesinger. She’s a CFP, a Certified Financial Planner, but unlike me, she is the Emmy-nominated Business Analyst for CBS news. Jill, a real pleasure to have you.

Jill Schlesinger: Thanks for having me. It’s great to be here.

Douglas Goldstein: Not only on CBS, but you’ve also got a website, you’ve got a blog, you’ve got a radio show; a podcast. You are out there sharing information.

One of the nice things about the way information is distributed these days, is that people all over the world can listen to it.

A big part of the audience that we have here, at The Goldstein on Gelt Show, are people who live outside the United States, but they’re Americans. In fact, a lot of them are in Israel.

One of the topics that comes up a lot, or the complaints, is that they feel that they are being taxed on things.

For example, when ObamaCare came out, they were paying healthcare tax on dividends. They’re paying income tax and they’re paying tax on passive income.

They have no representation in the United States, because there is no such thing as a congressman for U.S. expats.

This is unlike any other country in the world. Is this fair or should people say, “Listen, that’s just the cost of having a U.S. passport.”?

Is It Fair for the U.S. Government to Tax Its Citizens Who Are Living Abroad?

Jill Schlesinger: I hate to weigh in on whether it’s fair or not. It’s just the system that is. My aunt lives in Sydney, Australia. She’s so funny because she’ll say this to me, “My taxes are going up.” I’m like, “Well, you know, 40 years later you can always give up your U.S. citizenship.” She’s like, “Nah, I’m okay with that.” There’s not a lot to do about it.

I guess that the official stance would be, if you don’t like it, don’t go abroad. I know that’s not a very satisfying response.

There are all sorts of shenanigans that a lot of the investment bankers play with their employees whom they are sending abroad. They’ll gross them up. They’ll give them an extra bonus based on the fact that they are going to have to pay extra taxes.

For some of the folks who maybe work at a big bank, they’ll be in a place where the regulators will prevent them from earning a certain amount of money. They’ll earn their income in weird ways that comply with the local laws.

Essentially, if you’re going to do it and you are going to move abroad, the number one thing to know is that it is a bummer. You are going to pay more taxes and you’re not going to get a lot for that. You can wear your flag pin and be proud about, I don’t know, what are we good at? Basketball and the Olympics? Go crazy.

Douglas Goldstein: I think one of the issues that America doesn’t see so much, is that literally, these millions of people overseas, many of them are proud Americans.

They’re ambassadors to America. Many of them have businesses where they send business back to America. These are the people who are creating international cooperation on the business field.

It’s not just that Microsoft might have a research facility in Israel; it’s that there could be hundreds of other businesses run by Americans who live in Israel or Australia or England.

By allowing them to live freely and not be overtaxed, the U.S. would help to encourage more trade. Because who better to do trade with than the Americans living in that foreign country?

Jill Schlesinger: You make a great point. Of course, under this current administration, it doesn’t seem like the free flow of goods and services is a high priority. I might give some advice to those of you who are listening abroad, if that’s what you’re waiting for. Maybe in three years and nine months you might see something different.

Douglas Goldstein: I see you are not expecting this to last for too long.

Jill Schlesinger: One can hold out hope.

Douglas Goldstein: We often try to avoid politics, but we might end up there. Let’s say someone is living outside the United States, we can talk about your aunt or someone in Israel, who is used to the systems in America, used to stocks and bonds and mutual funds, but they no longer live there.

Does it makes sense for people like that to keep their money in the States, or should they just move it out?

If You Are Living Abroad Should You Keep Your Money in the States?

Jill Schlesinger: That is an interesting question. I was a financial planner for 14 years a while back.

When we had people living overseas and they were American citizens, they would generally choose to keep money in both places for a variety of reasons. I think more of it had to do with how you were paid, and in which currency you were paid. Whether you were self-employed or employed by a large company, it would drive a lot of that decision.

Obviously, if you work for a big U.S. conglomerate and you’re posted overseas, you’re still entitled to the U.S. benefits that are available, like the 401(k), the retirement savings plan. Whereas, if you contrast that with somebody who says, “You know what, I’m an American citizen. I’m going over to live in Tel Aviv because I have this amazing partnership with a biotech company and I’m developing this.”

For that person, I think the critical decision to make is whether you think you are going to come back to the U.S. enough to use an account there that makes sense, or whether you really see yourself thinking about retirement in one place versus the other.

Of course that gets us into the larger theme of most of what anyone thinks about on a personal finance basis, which is that it requires you to think ahead.

A lot of people are uncomfortable with that, “I don’t know where I’m going to be. I like to split the difference and say and do little on both.”

Douglas Goldstein: Yeah. I’m a big fan of splitting the difference. Jill, let’s move into the question on retirement, but I want to focus on retirement for people living outside the United States.

The concerns that people have now are that there’s going to be another crash in the market. One of the things that we often say is, “Why are you concerned about that? That’s just normal and markets crash on a regular basis.”

Do you think we are in some vastly different economic world today than we were a few years ago? That the way people are doing retirement planning should be vastly different from how they did it previously?

Jill Schlesinger: I will tell you the one thing that is different. That is that now, everybody understands just how bad market movements can be.

I would say, with the benefit of having global recession in 2008 and 2009, people should be smarter about how they look at the future.

In other words, you don’t look at the future and presume the best case scenario, because that’s what makes you feel better, or that’s what requires you to save the least amount of money every month. You look at the most reasonable outcome that one can suspect.

I don’t believe that it’s different this time. In fact, one of my favorite books about financial crises is a book written right around the financial crisis it’s called, This Time is Different.

Douglas Goldstein: Ken Rogoff.

Markets Have Patterns

Jill Schlesinger: Yes. Ken Rogoff and Carmen Reinhart. Basically, they went back and said, “Let’s look at all these big massive recessions that were caused by too much borrowing and too much lending. Let’s see what the outcome was.” They found that there was a pattern to it.

Just like that, I would say, as you said, there are patterns to markets. We don’t know when those patterns are going to show themselves. What we do know is that markets go up, and markets go down.

Over the long term, if you stick to a diversified portfolio, make sure that you don’t do anything dumb to your portfolio or to yourself.

You don’t try to mess around with it too much. If you do that, you’ll reach your objectives.

I’ve been doing this a long time. In my first job on Wall Street, I was a commodities trader and commodities are run in a very weird, cyclical way.

We ended up talking a lot about the economy and thinking about it. Every single time when someone would say to me, “No this is different,” it would always be the same.

I don’t think anything is different. What I do think is that we’ve learned valuable lessons the last decade. Those lessons are, when everyone is so excited and so ra-ra about something, whether it’s a housing market, a technology bubble, a biotech bubble, anything like that, that’s when you should have a tiny bit of cynicism.

I remember a client calling me and saying, “Is it possible for the market to go to zero?” I said, “No, it’s actually not possible. There’s always going to be someone buying.” When you think the worst is happening and you feel like you want to pull up your stakes and run for cover, that’s when you really say to yourself, “Look, it’s not different,” that we will get through this.

Use your head. Again let’s try to prevent those self-inflicted wounds that we often do all the time.

They could be little things, they could be big things, but the market is going to be the market. Don’t you go in there and muck around and try to outguess it.

Douglas Goldstein: It’s interesting you say that. It’s also interesting that you bring out Ken Rogoff who was a former guest here like you on The Goldstein on Gelt Show. In fact, as you may know, he was also a fantastic chess player, a grandmaster. When he came to the show, I was writing a book with world chess champion, Susan Polgar, about how the strategies of chess could be applied to investing.

It was interesting some of the comparisons he made in terms of the strategies that we were finding in chess, as well as the strategies that he felt people should apply in handling their investments.

I think the difficulty, Jill, of what you’re saying, is that it’s all shades of grey. When you say, “When the market is going up, when everyone’s loving the market that’s when you should sell,” people all over the market are at 18,000 and then at 19,000, at 20,000. If you said, “Well, I’m going to sell at each of those points,” then you missed out on the next five percent move up. It’s difficult to time it.

When the Market Moves Up, Stick to Your Game Plan

Jill Schlesinger: I’m not suggesting that you sell. I’m suggesting that when the market is going up, that you stick to your game plan. That could mean that you are doing some automatic rebalancing, or if you don’t want it to be automatic, you can do it yourself. I like anything automatic.

If you wanted, you could decide that you want it to be half risky stuff, half not so risky stuff. That every quarter or every six months, you make sure that your allocation is in that half 50-50 portfolio.

When the market is roaring higher and all of a sudden you haven’t done it in a while and you say, “I’m 70% in the risky stuff, 30% in the not so risky stuff. The market is going up. That’s fine, I’ll just leave it.”

The people who do that, the ones who try to trump their already articulated plan, those are the folks who run into trouble.

Again, I am not a market timer. I’m a big believer that if you stick to that diversified portfolio, and you don’t try to outguess the market either on the way up or the way down, and just stick to your game plan, you’re going to be better off.

Douglas Goldstein: All right. Sounds like very good advice. Jill, in the last few seconds, tell me, how can people follow you and follow your work?

Jill Schlesinger: I am the shameless plugger extraordinaire. I have a website and it’s jillonmoney.com. I also have a podcast that’s called Better Off. If you go to jillonmoney.com you can check it out. You can follow me on twitter @jillonmoney.

I’m on YouTube now. If you go to YouTube and you search for Jill Schlesinger, you’ll see my radio show is there, my podcast is there, the videos I do for the Certified Financial Planning Board of Standards are all there; everything is there.

That’s on YouTube, Jill on Money. That’s all you’ve got to remember.

Douglas Goldstein: We will look forward to that. Next time you are in Israel, stop by.

Jill Schlesinger: I sure will. Thank you so much for having me.