Offshore investing should not be daunting
When it comes to money and investing, we tend to let our emotions cloud our decisions. In the case of investing offshore, one of our prejudices is a so-called home equity bias.
A home equity bias is the tendency to invest the majority of our assets where we feel “safe”, in domestic assets. It’s easier to ignore the benefits of spreading our eggs across the different baskets of foreign markets.
If you have an investment need to invest offshore, here is why you should consider going abroad with your money, and how to do it.
* Benefit from more opportunities. Diversification is a key principle in reducing investment risk. By investing in international markets, you gain access to countries with different currencies and economic cycles to ours.
* Reduce emerging market risk. As an emerging market South Africa often feels the pain of how whimsical international investors can be. They are more likely to invest in emerging markets around the world while the good news lasts, and to disinvest when investment sentiment sours.
* Counter the effect of the weakening rand. Even though it doesn't always hold, economic theory suggests that compared to our major trading partners, South Africa's currency should depreciate in the long run. This is because our inflation rate is higher than the rates of most of our trading partners. To offset the increased cost of living, you need an offshore investment that can grow (in rand terms) due to rand depreciation.
* Hedge geographic and political risk. Investment returns can invariably suffer when governments make unpopular decisions. In the same way, disasters can cause havoc. These risks can be reduced through international diversification.
* Plan ahead for being overseas. If you are considering living abroad for a while or permanently, or that your children may study there, it’s safer to have your money there already.
* How to invest offshore. There are various ways to do offshore investments. You can invest rand into offshore funds denominated in rand, rand into funds denominated in foreign currency, or foreign currency into funds denominated in foreign currency.
It you want to go for the third option, the truest type of offshore investment, you have to convert rand to foreign currency such as the dollar, and use your offshore allowance. For the first two options, you won’t use your offshore allowance.
Government prescribes what this allowance can be, and South Africans older than 18 may convert a certain amount of rand to foreign currency every year.
James Klempster is director of Momentum Global Investment Management.