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22 February 2024

Diversify your assets in the current climate

By Gavin Smith

This week's situation comes from Brian Arlington, a 50-year-old American, who is the director of a company based in Dubai.

Arlington's annual salary is Dh6 million and his monthly outgoings total Dh450,000.

He owns a huge property portfolio in Dubai and the United States, about 50 of them, mostly well diversified in terms of area and value.

Arlington has, however, borrowed heavily in the past few years and with rental and sale prices plummeting, the portfolio is in negative equity.

He has a pension fund of about Dh20m. He also has 20,000 shares in his company, which provides oil related services and which are currently priced at $100 per share – they were as high as $200 per share two years ago. Arlington's dependants include two ex-wives, each with two children aged between five and 12, while his current wife has a passion for shopping and jewellery. He is now a bit concerned about job security and he feels his monthly outgoings and the property market are threatening to bankrupt him. He wants to put all his children through a good college and is looking to retire to the US within five years with a Dh5m a year income.

I am afraid to say that you have considerable problems with your personal finance. It is clear that you have not diversified your portfolio enough, with a large weighting towards property investment. You have worries about bankruptcy and therefore action is required.

You should consider selling the properties that have positive equity and balance any profit earned here against the losses encountered from the sales of those properties holding negative equity, so hopefully you can come out with something approaching zero gains.

This will also help you greatly reduce your monthly outgoings. As you are a US citizen you are taxed on your worldwide income and gains.

The first $87,600 of earned income is excluded from US tax and any gains are likely to be taxed at a maximum capital gains rate of 15 per cent on assets held more than 12 months. However, be aware that this is due to increase to 20 per cent from 2011. The fact is that, even though you earn a considerable amount of money, you also have extensive commitments.

As things stand, you are in negative equity overall and cannot afford to keep up with your heavy mortgage payments. As mentioned, the sale of some properties in positive equity will help offset those in negative positions. However, I would also suggest you consider selling your shares as, although they are at an all-time low, they should fetch more than $2m.

Luckily you have sensibly accumulated a large pension pot, which you cannot touch yet as you are only 50 years old. As you wish to retire in five years time, this is not likely to happen unless you can reign in your spending, sell your assets and diversify into safe assets. As you are likely to reside in the US within the next few years I would not suggest anything offshore but would recommend US mutual funds and perhaps US local authority bonds as the interest does not attract tax.

Independent Financial Advisor Gavin Smith analyses readers' portfolios. He is Area Manager for consultants PIC. Write to him at money@business24-7.ae


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