What if I told you that you it would be a great idea to invest the vast majority of your money in the stock market of one small, third-world country.
This country makes up less than 1% of the world’s GDP and has less than 350 investible shares on its stock exchange, which has delivered poor returns over the last decade.
It has economic policy uncertainty, catastrophic corporate scandals, the highest levels of inequality on earth, mass unemployment, a poor education system, a volatile currency and is a President’s heartbeat away from political chaos.
You would tell me I am crazy, right?
Well then, why the hell would you have the vast majority of your assets invested in South Africa, just because you live here?
In a poll Wealthwoke ran on twitter this week, over 50% of more than 100 respondents said they have less than 25% of their investible assets (excluding their house) invested offshore. 29% have between 25% and 50% offshore. Only 6% have more than 75% invested outside of South Africa.
In case you were wondering, I’m in favour of being in the over 75% category.
I speak to a lot of super successful business people who make rational, logical decisions every day. Except, it seems, when it comes to local vs offshore investing. The vast majority of these people consistently tell me they have little to no exposure to offshore investments.
There are plenty of reasons why I believe a locally dominated investment strategy is a poor option. If you want to read a great article about this, I suggest Magnus Heystek’s piece – “Sunshine journalism won’t change SA’s investing reality” – https://www.biznews.com/undictated/2019/05/23/magnus-heystek-sunshine-journalism.
For me, a simple lack of diversification is reason enough to make a South African dominated portfolio a ludicrous proposition.
For the purposes of this article, however, I want to focus on why so many smart people choose not to invest more of their assets offshore.
Here are a few of the reasons I’ve been given, as well as my feelings on them:
“I’m too busy to look at my investments”
Come on! You work too hard and take too much sh*t to have this kind of attitude towards your money. There is no meeting, client, or boss more important than getting this right. I promise you it’s pretty quick and easy to invest in a diversified offshore fund or ETF these days.
“I invest in a Retirement Annuity. That has an offshore portion, right?”
For many people, their primary investment vehicle is their retirement annuity. They trust that whichever fund manager they are invested with will allocate appropriately between local and offshore. However, due to Regulation 28, the maximum amount a Retirement Fund can invest offshore is 30%. In my opinion, that’s nowhere near enough.
“Overseas is risky”
It’s the 21st century folks. Time to un-circle the lager. I understand that it feels more comfortable to invest in local stocks as we are used to hearing more about these businesses in the media and often consume their products. However, as the slew of recent corporate scandals have shown, many of our corporate executives are no angels.
In addition, our local financial services companies are always talking up our economy and stock exchange. Don’t be fooled. It’s in their best interests to do so as their own balance sheets are often heavily invested in South Africa. They are also terrified of upsetting Government and losing lucrative mandates.
“The SA market is due for a rebound”
Maybe. Maybe not. I’m not going to bet the farm on it. To be clear, I’m not advocating for any rash investment decisions. Trying to time the market is a fool’s game. My approach has been to decide on a desired local vs offshore split and work towards it over a period of time.
“It’s a matter of patriotism”
I love my country. I want it to succeed and I never want to leave. I support our sport’s teams (well, maybe not the Proteas). I also try to give back in the form of job creation, participating in mentorship programmes and charity. But my hard-earned money needs to be invested using a clear, rational and unemotional process.
“It’s too expensive”
Fake news. Some of the offshore funds offered by local asset managers have been a bit pricey in the past. However, there are now plenty of locally based offshore funds with fees more or less on par with locally invested funds. In addition, offshore ETF’s or passive funds are available for less than 1%.
For various reasons, mostly to do with my need to mitigate any risk of a possible catastrophic meltdown in SA, I prefer to invest offshore using my foreign exchange allowance. Bear in mind you need Reserve Bank clearance for any amount over R1 million per year. I’m comfortable that the forex and transfer costs, as well as tax complications, are offset by the lower fees charged to access investment products (you can access the MSCI World Index ETF through companies such as Vanguard for 0.1%).
“I need to invest in the same currency I spend in, so there is currency risk with investing offshore.”
This is actually a good reason. However, my approach is to always leave enough in Rands to cover my living expenses for at least six months so that I don’t need to convert back from a foreign currency at a time when the Rand is enjoying a period of strength. Our currency has proven to be so volatile that it’s just a matter of time before it weakens for a while again.
Everyone should make their own decisions on this issue. All I am saying is that in my opinion, spending your time trying to choose which local fund to invest in is a bit of a red herring. Getting the asset allocation – which includes the geographical component – correct, is far more important.
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