Local investors concentrating on South Africa’s markets cannot continue to ignore the importance of offshore investments as part of their financial planning.
In short, you are going to lose out on investment returns and global growth if you shunt this valuable add-on to your investment portfolio. In the past two years, notwithstanding Covid-19, most people who invested offshore using their assets in their investment-linked living annuities made gains.
A quick glance at the latest available data proves that South Africa can realistically be described as a 1% country. For example, the gross domestic product of South Africa is about 0.5% of the world GDP and the JSE accounts for about 1% of global investment opportunities.
By investing only on the JSE, investors forfeit a 99% growth opportunity elsewhere. Finally, with the gradual depreciation of the rand since 1994, the rand currently accounts for less than 1% of world currency markets.
South Africa’s economy equals one of the US’s smaller states, making it quite a small economy by comparison. By concentrating your investments locally, you are going to lose out on investment returns for the following reasons:
- Not being able to participate in global growth;
- With a slower rate of growth, you also lose some of the benefits of compound investment growth;
- Concentrating locally, diversification and reduction in risk by spreading risk to more types of industries and services will not be achieved. Benefits of an income stream that will flow from these sources will be forfeited, which is particularly important for pensioners;
- It closes down opportunities to receive guidance from world-class financial investment professionals or international financial centres;
- Not having the peace of mind that offshore investors have. By spreading your funds beyond the local borders, you can escape some of the local political turbulence and its impact on the market.
We often field concerns from potential investors about the risk of moving out of familiar waters. The argument they often make is that the risk of moving into unfamiliar territory outstrips the potential reward of international diversification and foreign currency growth.
While there is always risk involved in international investments, there are ways that you can hedge your bets or invest in a proxy, such as an internationally diversified local fund or company.
In a future post, I will dig into some of the regulations and rules that apply to offshore investments.
Wouter Fourie is the co-author of the best-selling book The Ultimate Guide to retirement in South Africa with Bruce Cameron. Please visit www.retirementplanning.co.za for more information on this book and the top-seller Secure your Retirement.