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- Real Estate Agent Gets Crushed by Real Estate Math - June 8, 2020
Today I’d like to introduce you all to a friend I met during this year’s Chautauqua in Greece. I’m endlessly fascinated by how people from other countries pull off FIRE, and Steve Cronin is an expert on how to invest towards Financial Independence while living as an expat in the United Arab Emirates. Not only that, he’s got his own blog DeadSimpleSaving.com where he writes about expat investing, and he regularly hosts workshops in Dubai about this stuff, so we’re super excited to have him come on and share some of his knowledge:
Thanks, I enjoyed being part of your adventures in Greece… We performed a haka together, sampled the best food in Thessaloniki and got attacked by a Greek tramp. Good times.
First of all, let’s talk about Dubai. We talked a bit about this in Greece, but could you tell us a little about this city and why there are so many expats there?
People always ask me what it’s like to live in a place where all the women are covered up and you can’t drink alcohol. Well I’ve lived in Saudi Arabia and I can tell you, Dubai is not like that at all. There are plenty of women from all over the world wearing what the hell they like and you can get wasted every single night of the week if you really want to.
Dubai used to be a tiny trading post in the desert. My grandfather worked in nearby Abu Dhabi in the 30s when oil was discovered, and I doubt he had many cold beers. Dubai has some oil but what it really has is space, beaches, sunshine and a fantastic location between Europe, Africa and Asia. To thrive, it needs a constant supply of tourists, cargo, money and lots of expats to run and develop everything.
So Dubai goes out of its way to be foreigner-friendly and the city is about 85% expats. Everyone speaks English, you can buy, eat or drink anything you want and there is no tax on salaries or capital gains. Yes, it’s a good place to go for FIRE! People back home criticise the lack of ‘culture’ in Dubai but it is probably the cultural hub of the Middle East these days. There are more and more art galleries, theatres and concert venues opening all the time – you just need to know where to find them. I do a lot of improv theatre and every performance is packed – you certainly can’t say that about London, where you’re probably performing to your mates.
There are expats here from almost every country – it’s great for your geography. Lots of Brits, Australians, Europeans, South Africans and Canadians. Far fewer Americans though – curiously there are about 10 times more Canadians here. I’ll leave you to puzzle that out!
Why did you decide to move to Dubai?
I used to work for a management consulting firm, doing projects all round the world for banks and sovereign wealth funds (the institutions that manage the spare wealth of a nation, usually tens or hundreds of billions). In 2005, I was getting tired of the rain in Europe and was asked to do a project in Kuwait for 5 months. I looked on the map and thus began a life-changing introduction to the Middle East.
Back then, the working week in Kuwait was a painful Saturday to Wednesday. My friends back home would wish me a good weekend on a Friday evening but mine was already over. Dubai was like a nearby weekend Disneyland for us, so I developed an affection for the place.
After building a bank in Qatar and seeing the opportunities in the region, I requested a transfer in 2008 and became the first Financial Services consultant in our Dubai office. It was a fun frontier posting. The sunshine and lack of tax may have helped…
It was good timing – as soon as I moved over here, the Great Crash happened and lots of people in the London office got made redundant. Whereas I got a 30% pay rise in GBP terms due to crazy currency movements (the UAE dirham is pegged to USD).
Wow, looks like geo-arbitrage saved the day. Nice! As an avid world traveller, I admit that the Middle East is a giant black hole in our travels. What do you like about the Middle East, and what surprised you about it after you moved there?
A bigger question for me than why did I move to Dubai is why have I stayed here for 10 years? That’s a quarter of my life. There are lots of expats who came here for a few months and never left.
First, people work hard but life is quite easy – I haven’t dealt with a British winter since 2004 (no Canadian winters for me!). It’s a small but rich town – you can make your mark here, build a great network and create a successful business starting with just a dollar in your pocket. In fairness, you can also burn through all your money and have to abscond, leaving your Lambo to rust at the airport. I try to stay frugal – it helps that I live in a big villa with a private garden and communal pool but hardly pay any rent (about $270 a month). Rent can be a killer here and you have to get smart about these things!
The work here has always been more fundamental and interesting (e.g. building a bank out of $1 billion and 3 staff) than in more developed countries (e.g. improving a bank’s credit card profits by 5% zzzzzz). Now I’ve become a bit of a FIRE evangelist, I feel I can really help people here. I get in the newspaper and on the radio far more easily than I would back home. One of the highlights of 2018 was packing 100 FIRE wannabes into my garden to hear Andrew Hallam (the expat investing guru) speak.
There is a real entrepreneurial spirit – nearly everyone has proactively moved here from home to make something of their lives, so there are plenty of interesting people. But everyone is away from home, so with that comes loneliness. You end up compensating (initially) through excess spending and partying. It can be hard to make good friends though – it can take at least a year to truffle out those you genuinely like rather than those you hang out with because they’re all you know.
Because there are so many English-speaking expats, I hardly speak any Arabic and I can’t say I have any close Emirati friends. This is perhaps one regret, as there are plenty of smart, progressive ones (as opposed to the ones who cut you up in their giant Nissan Patrol with 5 kids in the back not strapped in).
While Dubai is all about building the future, much of the joy of the Middle East is in the history and desert scenery. Unmissable highlights would be the pyramids and coral reefs of Egypt; the nightlife, amazing food and Roman ruins of Lebanon; the Dead Sea, ancient Indiana Jones-featured buildings in Petra and crusader castles of Jordan; the larger-than-life buildings of Dubai and the turtles and oases of Oman. I can’t comment on Israel, as you can’t get there directly from Dubai.
And now onto the main thrust of the interview: How easy is it to invest towards FIRE in the UAE?
Unfortunately it is neither simple nor easy, but if you crack the code then the UAE is a fantastic place for FIRE hunters.
Let’s look at what’s with you and what’s against you on your FIRE journey here.
Booster#1: No tax
There’s a 5% VAT on goods and services, but that’s it. Your salary slip says $50,000, you get $50,000. You sell an ETF with a $10,000 capital gain, you keep $10,000. Tasty. Oh, unless you’re a US citizen, in which case Uncle Sam will tax you anyway. Maybe that’s why Americans don’t bother to come here.
There are good salaries and senior positions here, plus you can work your way up faster in this new town than you could at home. You can also ‘time travel’, by finding cool new businesses or innovations elsewhere and bringing them back to the UAE.
Bummer#1: Cost of living and the green-eyed monster
Dubai is one of the top 30 most expensive cities in the world. And there is always someone richer than you. Many people burn through their money just to keep up with the Joneses or to make up for being stressed, lonely and far away from home. Dubai is also a place of fabulous restaurants, brunches, parties and shopping malls – spending money is not hard. Having said that, there is a thriving second-hand market for anything and plenty of cheap eateries if you adopt a frugal mindset.
Bummer#2: No pensions, good advice, or cheap brokers
There are no government-sponsored saving schemes, plus few reliable sources of information on investing. You are on your own – no wonder many people save nothing. Vanguard, Charles Schwab and Hargreaves Lansdown aren’t interested in you. It took me 5 years to figure out how to invest in Vanguard ETFs as an expat (ok, I was doing other things), so I had to write about it here: https://www.deadsimplesaving.com/blog/guide-offshore-investing-expat-etf/
Bummer#3: Bad advice
There are lots of rogue but legitimate ‘financial advisors’ aka used-car salesmen persuading you to invest in long-term, insurance-wrapped savings plans and whole life insurance schemes. Why? Because they get upwards of $10,000 in commission the moment you sign on. These people are invariably charming and befriend you on the golf course or get your number from your colleague. Maybe you should transfer your lovely pension offshore too? Unfortunately, these plans (banned in most developed countries) have high fees (4% and above!), have huge surrender penalties of up to 100% if you try to exit early and are usually invested in expensive, niche active funds. Like Indian Healthcare or Chinese Small Caps. FIRE seekers must, must avoid them. As well as avoiding various pyramid schemes and dodgy business investments that are even worse.
OK so now we know what NOT to do. Let’s start with what we SHOULD do. First of all, do you invest in UAE dirhams or do you convert to another currency?
I convert my dirhams into USD when investing.
Why is that?
The UAE dirham is pegged to USD. There is some debate for expats about whether you should invest in the currency you earn in (my view) or the currency of the country you plan to return/retire to.
I think it’s better to take advantage of a good exchange rate every month by converting into USD while accumulating. It’s hard enough to invest monthly regardless of stock market movements, without having to worry about exchange rate movements as well. Then, when you get closer to going home, you can exchange larger chunks of money and get a better rate for big transactions.
Don’t you have to worry about currency rate fluctuations?
There is a risk that your home currency moves unfavourably against USD just as you are about to move back and buy a house there, but I would worry about that nearer the time. Also, lots of expats have no idea where they want to live in the future anyway!
Another point is that many global stocks are driven by USD anyway, so whether you invest in them via GBP, EUR or USD makes no difference. Bonds are more sensitive to currency fluctuations though, so it may be worth thinking about changing at least part of your bond portfolio out of USD as you get closer to moving.
OK so once you get your money into USD, what do you then? Do you open up a Vanguard account?
Vanguard only deals directly with residents of a few countries like the US, Canada, UK and Australia. Everyone else has to use a brokerage, like a market for stocks and funds, to access Vanguard products. Expats often can’t open broker accounts in their home country, so they need to use an offshore broker. You can sometimes use the brokerage arm of a local bank in your country of residence, but you will get ripped off on fees and exchange rates.
The offshore brokers usually recommended are Interactive Brokers (IB) based in the US and Internaxx, SwissQuote or Saxo Bank from Europe. I use IB because they are large and cheap.
Is Interactive Brokers the only American brokerage company that allows non-residents to open up accounts?
Zacks Trade also accepts non-residents, but lots of others such as Robin Hood and Charles Schwab are only open to residents.
How do you get the money to your brokerage? What about transaction fees?
You don’t want to send money to your brokerage in the wrong currency and certainly not one they don’t accept. They will charge you a hefty fee to change it. You can use your local bank to exchange currencies and transfer the money directly, but they will invariably give you a bad rate and charge high fees. The best method in each country is different and it pays to shop around a bit. In Dubai, UAE Exchange’s Club Exclusive program is the best to use. In other places, you can use CurrencyFair or TransferWise.
And from then on, do you use Vanguard ETFs just like everyone else?
Yes, you can buy Vanguard ETFs through your brokerage. In fact you have to buy ETFs, as expats can’t buy mutual funds very easily. So Vanguard LifeStrategy is out, unless you have £100,000 to invest with SwissQuote.
Next is picking globally diversified stock and bond ETFs and considering your asset allocation. Personally, I like VWRD and IGLO. As I mentioned earlier though, you might want to consider bond funds in your target ‘home’ currency.
Some people advocate having a home stock ETF as well, to protect against further currency movements before you move home, but I prefer having a geographic distribution similar to world capital. You are so exposed to your home economy anyway if you choose to return – house prices, job availability for you and your family etc. I find it better to diversify your funds away from the home market, as any Sovereign Wealth Fund would do. The $1 trillion Norwegian fund certainly does not invest in Norwegian stocks! Lots of large companies in your home exchange will be global anyway and less driven by local economy movements.
There was also something weird we talked about, where the fact that you were a non-US resident had strange implications for estate taxes. Could you tell us more about that?
For expats, it’s important not to invest in US-domiciled funds like VT. If you die, your beneficiaries would be hit by a 40% estate tax on anything over $60,000. Ouch! Irish-domiciled ETFs (look for UCITS in their name) are much better as they have no estate tax. They also pay only 15% withholding tax on the dividends of US stocks rather than 30%.
OK so here’s an odd comment that I remembered from Chautauqua. We speak out against various shady banking practices like charging high fees on mutual funds on this blog, and at one point one of you asked me whether we have ever been threatened to stay silent by those banks. And I was like, uh no, they would never do that. But apparently in the UAE, that’s not an uncommon thing. Care to comment on that?
Libel laws are strong in the UAE, so it is not worth saying anything publicly against a specific individual, company or product. We warn people about savings plans and bad financial advisors more generally instead. It’s less effective but necessary to keep going. We are also very strict about what we allow to be posted on our FIRE-related facebook groups (such as SimplyFI) – again, no names when complaining. I know of other facebook groups that received legal notices when people complained about certain companies. Anyone here more than a year knows who the usual suspects are anyway 😉
Have you ever been personally threatened?
No, but I know people who have been threatened and followed etc. for taking on similar companies in London, and then they moved out here to escape. Others have had fake websites appear, trashing them online. You just have to be sensible – the occasional hate mail can be quite amusing.
The big players know that the good old days are over. With tighter regulations coming slowly and robo-advisors and Bogleheads groups coming fast, they have to change or die. And I welcome any form of improvement even if, so far, it has been of the ‘low tar’ cigarette kind.
How do you continue to write and teach about FIRE in an environment like this?
You get used to it, just as you get used to not kissing in the streets of Dubai. It’s not a threatening environment – you watch what you say, so that companies looking for an excuse to make your life difficult can’t find one so easily. Or you find someone outside the country willing to say it for you!
OK to end on a lighter note: What are your plans? Are you close to FI? Are your plans to stay in Dubai post-FI or are you going to come chill with us on a beach in Spain?
One whole year of working my backside off in Saudi during 2016/17 helped me to reach FI. I took 3 days of holiday that year, but I had a clear intention. That got me through the long days and evenings. I want to spend a lot more time spreading the good word of Financial Independence, especially for expats and people outside of North America. Advice for them is much harder to come by and badly needed. I’m also planning to spend a lot more time outside of Dubai, so maybe you will see me soon!
Awesome, well Steve thanks so much for coming on the blog and offering your insight. Steve writes on his blog DeadSimpleSaving.com, so be sure to check him out there especially if you’re an expat or in the UAE!
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