156 - How to reduce the risk of having all your investments in South Africa

Question:

I am concerned about the safety and security of our investments in South Africa.  We do not intend emigrating but would like to ensure that we protect our assets.

Answer:

South Africa is a developing country and faces many of the challenges that developing countries face. We are also in an election year so all the country’s problems will be highlighted.  This can be quite scary.

There are a couple of things that you can do to protect your investments:

• Diversify

I like to reduce your overall investment risk by structuring your investments correctly.  If one asset class is underperforming, the chances are another asset class is performing very well. This can protect your investments in volatile times.

• Invest offshore

In terms of its size in the world, we account for less than 1% of the global GDP.  This does present a concentration risk. If you were living abroad, would you invest all your assets in South Africa?

One of the tools that we have when it comes to structuring investments is to have some of our assets physically located offshore. There are a number of benefits to this: 

• you have access to a much broader pool of companies to invest in
• you reduce the risk of having all your assets in one country
• you do not pay any CGT on currency depreciation (Those can be quite a saving as over the past three years, the Rand depreciated by 28% against the dollar)
• If you go and visit friends and family living overseas, you can access these offshore investments while you are there and not have to worry about the state of the Rand.

I have seen several studies that indicated that when it comes to reducing risk and maximizing returns, you should have between 25% and 40% of your assets physically located offshore.

If we look at how the local market has performed, we have 

Now, when we compare it with how the US market has done, we see that your investments would have benefitted from being exposed to the USA market. 

This is not the full story though, you will also benefit from the rand depreciating against the dollar 

There will be times when the local market will do better than the US and there will be times when the rand will strengthen against the dollar so do not just chase last year’s winner.

It is very easy for you to convert R1m into dollars each year. This makes it easy to start building up an offshore nest egg.  There are also lots of really good investments that you can access with this money.

Health warning

Offshore investments do you come with their problems and if your investment is incorrectly structured, you can find yourself encountering massive delays in sorting out the estate if the investment owner passes away.

There can also be nasty surprises on the income tax front where you may have to pay large inheritance taxes. I would therefore recommend that you speak to her knowledgeable financial planner who can help you set up the correct structure and avoid these potential problems.

Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives.  You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za