Is there a golden rule when it comes to offshore investing that will tell you how much of your capital to invest – and when?

Regardless of what has happened in the past, there is not going to be a quick turnaround for the economy in South Africa. Currency fluctuations and market movements remain highly likely in emerging markets, with South African contributing less than 1% of the global GDP. Instead of putting all your nest eggs in one, local basket, one should ensure exposure to assets in global markets and reduce country-specific risk.

Many investors are turning their attention offshore when developing their future financial plans, but there is still uncertainty over what percentage of your asset base should sit overseas, and when exactly you should move your money. While everyone is looking for a universal answer to this question, there is no one-size-fits-all approach. Before making this decision, an investor should consider the following:

Always consider local and offshore

Investing offshore doesn’t have to be an either-or decision. SA and fellow emerging markets have underperformed developed markets over the last decade, but they may outperform developed markets over the next few years. It is important to highlight that South Africa has moved in tandem with other emerging markets, we are not an outlier, despite how negative and depressed we feel in the darkest hours of loadshedding. 

Assess your goals

The first port of call is to ask yourself: Why am I taking assets offshore? Do you want to send your kids to university internationally? Are you looking at buying a property overseas? What is your long-term plan? Do you want to retire locally or overseas if your children emigrate? These questions will help guide your offshore investment decisions. For example, if your intention is to retire in South Africa, your retirement should still be majority funded by local assets. Why? Because you are spending Rands, you can generate higher yields locally without taking the risk of currency fluctuations and market movements. 

Consider Joe Blogs, retired age 70, and needs R50,000 per month to survive. SA Bonds currently yield in excess of 8%, so he needs R7,5 mil retirement capital to live off the interest alone, ignoring tax, increases, and assuming he doesn’t want to draw down any capital. In order to achieve the same goal offshore, where 10-year bonds are yielding 1,75% currently, he would need to invest $2,3 mil or approximately R33mil (assuming exchange rate of R15 to the Dollar). If he does not have this amount of capital, he would need to draw down on his capital to cover the shortfall. If you externalise all your assets, and then get hit by a strengthening Rand and a selloff in offshore equity markets, you’d need to substantially increase the percentage of income you’d draw from your portfolio. The result is that the more shares or units you sell to cover the shortfall, the less income the portfolio generates, and you’d need the markets to perform that much better in order to catch up. 

On the other end of the spectrum, consider Mary, age 40, with young children and 30 years to retirement. Mary has a primary residence in SA, as well as a corporate pension fund. We believe this is sufficient exposure to assets in SA. But Mary wants to send her kids to university abroad. One solution is for Mary to purchase a property overseas that will provide an income or be an appreciating asset, while interest rates overseas are at all-time low. Any excess cash Mary has could be externalised into hard currency with a 20 year view.

There is no “perfect” time

Trying to time both currency markets and equity markets entry points of your offshore investment is impossible and waiting on the sidelines can be the cause of value destruction,  so while exact timing is difficult to work out, regular offshore contributions average out your currency and equity market risks.  

Before you go…

Remember: there is no golden rule when it comes to investing, either locally or offshore. It is important to also filter out the noise and not allow your emotions to impact your long term investment plans – sound investment principles should always remain. The only way to make sound investment decisions is to consult with an experienced advisor, understand your personal goals and develop a diverse portfolio that meets your requirements.

Talk to a consultant about your offshore plan today. 

LinkedIn: Dino Paizes CFP®