Investing offshore should never be a knee-jerk reaction to current events, but rather a decision that is taken as part of an overall financial plan. With elections looming and many investors in panic mode, South Africans need to make sure they are investing offshore for the right reasons.
These include the need to diversify your portfolio and broaden your exposure, rather than making your decision based purely on a weakening Rand or negative news headlines.
Why invest offshore?
More and more South Africans are investing offshore, seeing it as a good strategy to vary their funds and spread their wealth to other jurisdictions.
Investors are really starting to see the benefits of diversifying their investments. There are those people who invest offshore out of fear, but most people now see it as a good financial decision.
How diverse should your investment be?
As a rule, investment managers always diversify the allocation of investments between cash, bonds, equity, property, and offshore simply to safeguard their client’s wealth in all asset classes.
A lot of people have gone offshore with the big promise of the Rand dropping or invested their entire portfolio into a fund that they thought was safe, however not all asset classes will perform consistently well.
It’s easy to invest in the wrong things when there is uncertainty over what the market holds.
Potential investors should consider getting involved in a portfolio with secured, protected principle capital, where their advisor has built in some protection and a fixed return.
Selecting the funds that are right for you
With between 40 to 50 thousand offshore funds to choose from, which do you choose? It is important that people are aware of what the fund entails and ensure that they understand the risks involved.
It’s also important to consider the fact that offshore investments are not necessarily conservative as there are high costs involved, so you need to make sure you are working with an advisor who knows what they are doing.
When it comes to moving money offshore, investors must be prepared to play the long game, especially where market conditions can be volatile.
It is crucial for investors to stay in the market, and while people may feel a strong need to protect their capital by pulling out their investment, especially during uncertain times, these investors may miss the opportunity of meeting the upswing and potentially losing out on a significant yield.
Understanding the impact of exchange control
The inherent risk is exchange control. Just one scenario is the Rand, which is quite unpredictable; it can strengthen or weaken at any time.
When you are taking your money offshore, you are able to diminish that risk the longer you stay. You also need to make provision for funds, particularly those that offer good solid returns, where historically those funds will ask for a five-year minimum stay.
For that reason, you will be forced to stay for longer to benefit from the maximum return. It is possible to get out earlier, but in that scenario, one should expect a drop in their return.
Rule of thumb
By investing in cash, property, bonds etc. you get good exposure while still maintaining a manageable risk profile.
As a general rule of investment, one should never put all of their eggs in one basket, and the same rule applies for offshore investments too. An aggressive portfolio can be diverse, although there are other conservative funds to consider.
Either way, there is no one asset class that is always at the top of the performance list, so one must play the field with the understanding that your horse won’t win every race.