Should I invest offshore?
I am worried about the declining rand. Should I take my money offshore?
M Hassan
Jason Bernic, Financial Planning Coach at Old Mutual Wealth, responds: Offshore investing has always been a hotly debated issue, and recent developments have not helped. With the high levels of emotion around our political and economic situation, the offshore investment debate has been given new vigour.
Daniel Kahneman, a behavioural psychologist, won a Nobel Prize for economics for showing us that investors react roughly twice as emotionally to a loss as they do to a gain. Furthermore, people become anchored to current developments without even considering possible future scenarios. The combination of these two mental biases often leads to poor and irrational investment decisions. If we consider the media attention our currency, economy and political environment have received over the last year, it is easy to understand why some investors are looking to take their money offshore.
There are generally three main reasons for wanting to invest offshore:
• The first is to have a hedge against the depreciating currency.
• The second is economic diversification. The rationale is that you can favourably diversify risk if you invest in economies that behave differently to ours. However, investors should ensure that they get the appropriate market exposure and that it is actively managed. Many investors who take their money offshore often end up leaving it in cash.
It is also vital to understand that other economies do not necessarily perform better than our own. From a return perspective, the grass is not always greener on the other side, so do your homework first.
• The third reason for investing offshore is political risk. When the rand dropped against the US dollar at the end of last year, many investors fled overseas to protect themselves. The rand’s subsequent return to more realistic levels has left many retirees in a position where they needed to start working again. If you want to invest offshore due to political uncertainty, ask yourself whether you can afford to be wrong.
Before deciding to go offshore, be sure that you are doing so for the right reasons and that your offshore portfolios are effectively managed to complement your local portfolios.
Remember, it is generally best to stick to your investment strategy, especially during periods of short-term volatility.