There’s still no place like home

Local is Lekker | The pitiful rand has investors worried about investing in SA. The facts bear out the wisdom of doing so

GIVEN the massive drop in the rand over the past few weeks and the very recent losses on the JSE, some investors are starting to wonder if they should rather invest their money overseas, away from our volatile economy.

This type of thinking is very similar to what was experienced in the early 2000s when the rand blew out against all the major currencies. Many thought that the rand would decline continuously to the point where it had no value. History proved that those who sent money out of the country at that time made a mistake and doing so this time might repeat the error.

THE JSE PROTECTS AGAINST US INFLATION TOO

With the way the rand has fallen and all the negativity surrounding the South African economic and political situation, I am often asked whether investors should not simply invest their money overseas. This is a completely understandable question but it might not be your best investment strategy. In my view, unless you think Zuma- nomics will destroy the South African economy, you must maintain a sizable investment in the JSE to ensure long-term investment success. Many of the biggest companies on the JSE earn the majority of their money from outside South Africa. This means that any depreciation in the rand will actually increase their profits, which is positive for their share prices in the longer term.

The fund managers that I believe provide the best investment research, Cannon Asset Managers, created the graph below. It shows the return of the JSE in US dollars (green) against the US inflation rate (blue) and the US stock market (red). As you can see, even with the recent blowout in the rand and the sharp drop in the JSE, South African investors still handsomely beat the US inflation rate and the US stock market over the past 10 years. The graph shows that the JSE has beaten US inflation and the US stock market over all the preceding 10-year periods from 2006 to now. You can also see that the JSE underperformed in the 10-year periods from 1997 to 2006.

Given this information, even the most hardened Afro-pessimist would have a hard time arguing that it is always better to invest outside of South Africa. For me, the graph further illustrates the value of a properly diversified portfolio of shares where you have exposure to the JSE and offshore markets. The primary reason for this diversification is to protect against stock market events that are totally unpredictable but massively damaging to investors.

HOW MUCH TO INVEST OFFSHORE?

If you plan to spend your life in South Africa, you should have an offshore investment allocation that equates to 20% to 40% of your net wealth.

It is important to note that you can get a lot of this offshore allocation via local unit trusts, exchange-traded funds and even some of the pure rand hedge shares. If you are planning to spend a large portion of your time (and therefore your money) outside of South Africa, you should invest 35% to 70% of your money offshore.

More importantly, you must invest a significant portion of this money directly overseas — that is, using your offshore allowance, so that you can access the money from overseas when required.

Ingram is the author of Become Your Own Financial Advisor