Should I sell shares I’ve inherited and invest the funds in a worldwide index tracker fund?

First, do an analysis on these equities as some of them may be good investments you may want to keep in place.

I am in my 70s and inherited shares from my late brother. I thought of selling the shares and investing the money in a worldwide index tracker fund since I do not have much offshore exposure at the moment. Is this a good idea?

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Dear reader,

Depending on your risk profile and specific risk appetite, offshore exposure can form a crucial part of diversification in an investment portfolio.

The first benefit is diversification:

Your offshore allocation will diversify risk across different economies (currently very important for some SA investors), different regions, sectors, securities and fund managers to find opportunities.

Locally we have approximately 1 300 funds registered with the Financial Sector Conduct Authority. Globally, there are more than 200 000. Looking at stocks, there are roughly 350 listed on the JSE’s main board, compared to 60 000 globally.

Just as asset classes behave differently in different market cycles, the same diversification of risk applies to different economies and regions – when one is under pressure, another might be soaring.

Secondly – hedging against a weak rand:

Protecting yourself against the longer-term depreciation and volatility of the rand is another benefit. Be sure not to try to time the market when investing offshore, as exchange rate movements – especially with the rand’s volatility – are very difficult to predict.

I am not sure what shares you inherited so I will advise asking a wealth advisor to first do an analysis on these equities as some of them may be good investments you may want to keep in place.

There will also be capital gains tax implications when selling the shares.

An estimate can be calculated and an informed decision can be made as to what strategy would be best to sell off some shares. It can be done over multiple financial years if needed to minimise any unwanted tax implications. You have certain tax exemptions on capital gains tax on an annual basis, so trying to stay within these exemptions will be ideal.

Offshore investing forms part of a diversified approach to investing, however, a diversified approach can also be achieved by including all asset classes. This will include cash, bonds, property, and local as well as offshore equity exposure. Combining asset classes by investing in a multi-asset portfolio will also ensure a more resilient portfolio when experiencing market volatility.

Regarding the type of offshore exposure to select – active management and passive management have their own advantages and disadvantages and you and your financial advisor will be able to determine which would be more ideal depending on your need and capacity.

My approach generally would rather be to follow a more actively managed approach. There are excellent index trackers available, but an active management approach may possibly protect you more on the downside should there be market volatility. You may also expect a higher return in the longer term.

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“My approach generally would rather be to follow a more actively managed approach. You may also expect a higher return in the longer term.”

Proof?
67% of US Funds have failed to beat the S&P1500 index over 3 years
That increases to 72.8% over 5 years, 83.2% over 10 years and 86% over 20 years!

Sure the reader is already in his/her 70’s and I know that changes things, but such a blanket statement is definitely not applicable to long term investors, who wants to play Russian roulette with a only 14% chance of picking a fund that will beat the market over 20 years when you can guarantee with 86% that you will at least have the market average.

In your 70’s? Sell the damn shares and have some fun whilst you still can! Investing offshore means hideous fees to someone you don’t know and money to SARS in Estate Duty which will eventually be stolen by some politically connected crony anyway. Enjoy the windfall from your brother…he would want you to!

End of comments.

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