As a quick refresher, we’ve explained to you how risk is required to generate a real return over time, and that should you wish to generate a meaningful retirement balance, you have to come to terms with risk.
This does not mean that you dive foolishly into online currency trading on your weekends – no.
Risk is to be accepted with respect. Like nunchucks, which are awesome, but can turn on you at any instant.
One of the ways in which we manage risk, is to diversify. We took you through what it means to diversify your investing risk and how not putting all your eggs in one basket was not simply a catchy thing to say, but a strategy that offered tangible benefits.
Within the discussion on diversification, sits the discussion on whether to invest onshore or offshore.
To invest all my money in South African assets, or send it offshore?
When it comes to deciding where to invest one’s money, people place most if not all their trust in their financial advisor or a local financial institution to decide what’s best for them. In most situations, your money will find its way into a local Unit Trust of sorts, or a pension fund. Some unit trusts and some pension funds have an offshore element, in that some of the money does find its way into foreign shares and assets classes, but there is a definite bias toward investing in South African assets alone.
Local might be lekker, but there is a big, wide world out there that demands your attention.
The Johannesburg Stock Exchange (JSE) and South Africa as an investment destination is unarguably very large and well developed, however it only comprises somewhere between 1% and 2% of the world’s share of stock markets. The JSE has also built its large value on a few select industries or sectors. Nearly half of the value of the JSE comprises the shares in less than 10 companies.
These companies are involved in mining, financial services, consumer services, and consumer goods.
It then becomes apparent that relying purely on the JSE as a destination for your long-term wealth may over-expose you to certain sectors whilst not giving you exposure to other sectors.
Well, because we want to diversify the shares we invest in.
So what might you be missing out on if you only invest in the JSE?
The obvious missing elements are things like technology companies and utilities companies. A utilities company is typically a company that sells things like electricity, or generates power.
Apple and Facebook, is a good example of a company in the tech sector, something the JSE has little of.
By obtaining exposure to assets and shares in other counties and sectors, one can diversify one’s portfolio even more so than simple deciding between shares and bonds.
We don’t expect you to decide yourself which foreign assets you need to be investing in, but you need to keep an open mind. There are lots of South African fund managers who offer offshore options and you’d do well to chat to them – under the guidance of a decent financial advisor of course.
Having said all of this, there are also good arguments for aligning your long-term investing assets with your long-term liabilities, regardless of where you live.
If you plan on retiring in country X, you’ll be paying currency X costs until the day you die.
Health care, professional fees, food costs; all of these will need to be paid in currency X. If your assets are kept in currency Y, or exposed to country Y asset class returns, it is possible that you may see a separation of economics.
What do we mean by this?
Well, if country X generally experiences higher inflation than your chosen country for your retirement money (country Y), you may find that the returns on your retirement assets are insufficient to keep up with the rising costs of retiring in country X.
Without complicating things, typically what happens though is that if country X experiences rising inflation, country X’s currency will depreciate relative to country Y’s. So although your assets are denominated in Y, when you sell them to fund your X lifestyle, you’ll get more X’s for your Y’s.
While inflation may run away from your asset returns, a more stable currency may provide the extra return you require.
There are many discussions we could have around offshore investing. The above are only 2.
Some people see offshore asset allocation as a way to mitigate against sovereign risk. Sovereign risk is the risk attached to investing in a particular country.
Naysayers may say that country X is doomed and that they don’t want to invest their money there for fear of the government taking it all. Their preference is to invest elsewhere, where capital is free to move and they feel more comfortable that it’ll still be there in 20 years’ time.
That’s fine, and there is nothing wrong with that. If that’s you, then we would ask that you consider the risks of mis-aligned economics as discussed above.
In the end, neither offshore nor onshore is correct or better for that matter, but considering only one is most likely near-sighted.
Investment diversification is good.
Don’t let your preference for things you know and understand, or for television ads that you’ve seen on TV, narrow your investing universe. Engage a good financial planner to enquire as to what offshore options are available to you, or what offshore exposure you might currently have.