Should you be investing offshore?

Wall Street equities analyst, Barry Ritholtz, put it simply when he said: “The beauty of diversification, is that it is about as close as you can get to a free lunch in investing.”

As investors, we need to always take cognisance of this particular principle if we are to ever achieve our investment goals. For this reason, all of us should have at least some interest in offshore assets. Regardless of your optimism or pessimism towards the future of South Africa, it would be prudent to have a portion of your total portfolio externalised.

When we consider the fact that South Africa’s GDP represents only 0.37% of the world economy, we begin to see just how over-exposed we are to this country. Most of us build our houses on South African soil, we run our businesses proudly South African, and we earn and save our money in South African Rands, yet most South Africans hesitate when it comes to foreign investment.

We believe that part of this hesitation stems from the uncertainty and confusion around investing overseas. This is entirely understandable. There are over 60,000 listed companies to choose from around the world, the currency seems to be getting more and more volatile every day, and foreign tax laws and exchange controls are perpetually changing. In addition to this, there seems to be a prevailing assumption that investing offshore is expensive, and difficult. It is simply too easy to become overwhelmed.

The reality is that the costs involved in investing outside of South Africa should be no different to a local investment, and a good financial adviser would be able to make the entire process surprisingly simple.

While currencies will fluctuate over a short-term period, the long-term trend points to a weakening rand. By investing offshore, not only are you reducing your risk by asset diversification, but also by hedging against rand depreciation. Foreign investment also affords the investor access to a vast universe of opportunities not found on local shores.

One of the primary goals of most investment portfolios is to grow with or above inflation. You might not realise it, but you have a specific rate of inflation applicable to you and your lifestyle. A good exercise to do, is to evaluate the kinds of goods and services that you use daily, and consider whether or not they are produced in South Africa, or overseas. Your car, its fuel, your mobile device, your internet streaming services, your medicine, and even your food, is all linked to the U.S Dollar. In order to keep up with the inflation applicable to these foreign goods and services, your wealth needs to appreciate in international terms.

The fundamentals show that international stock markets offer long-term inflation-beating growth whether measured in rands or hard currency. That being said, you are not limited to offshore equities alone. There are solutions available to investors anywhere on the risk spectrum. Whether you are more inclined to conservative investments or whether your appetite is for more dynamic growth; there is a solution that will suit your specific needs and goals.

While returns and risk-profiling are important considerations to make, it is equally important to consider the offshore investment structure itself. Tax and estate planning consequences of the various offshore structures will vary; and we once again recommend that you seek professional financial advice on this topic, should you wish to make an informed decision.

While it would be difficult to broadly talk about a pre-defined portion of wealth that should be invested offshore without evaluating your specific portfolio; we do believe that your ideal percentage will be higher than you think.

For more information contact Stian Schutte at the PSG Wealth Nelspruit office:
Call (013) 752 6647 or email [email protected]

Article written by Cameron Muller, PSG Wealth Melrose Arch.


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