Key pointers to consider when investing offshore

The main objective of diversification is to divide your assets into specific classes and regions. This will automatically reduce your overall risk and volatility in your portfolio, which will help you avoid making some costly mistakes driven by greed and fear. Diversification helps your portfolio remain robust and relevant as market conditions change and can help you remain on track to achieve your investment goals. Whether you are investing in the global, or local market, the same rules for diversification always apply. You need to decide how much offshore exposure you want as part of your diversified portfolio.

Some key pointers to keep in mind include:

Global diversification

Offshore currency and economic exposure is essential when building resilient long-term portfolios. Limiting your investments to one geographic region or currency (South Africa) will greatly increase your risk and volatility. You need to have exposure to other countries and currencies and this can be achieved by investing directly offshore or using rand denominated offshore funds.

Market diversification

A good general equity fund or balanced fund asset allocation can ensure that you gain exposure to many different industries and market sectors. If you only invest in specialised sectors such as gold or property, your risk and volatility will rise significantly.

Manager diversification

Like different sectors of the market, different kinds of fund managers also fare well at different times. The best performing funds this year will not necessarily be the best performing funds next year. It can be useful to combine managers with different styles. You can diversify by choosing a portfolio combining active and passive fund managers.

Active management would mean using a single fund manager, co-managers or a team of managers, to actively manage a fund of fund portfolio.

Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.

Asset class diversification

The basic building blocks are equities, fixed income, property and cash. You should aim for a mix that suits your risk profile and investment horizon.  This will provide enough growth (equities in the long-run) and enough stability and yield (cash, fixed income and property) in the short- and medium-term. Your selected fund manager should provide the necessary asset class diversification.

Tactical changes may be useful from time to time and a financial adviser can help you decide on a suitable long-term diversified allocation.

Article was written by Ian Daniell, Financial adviser at PSG Wealth Uitenhage for any questions about offshore investing please contact Stian Schutte at PSG Wealth Nelspruit ([email protected]).

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