However, when considering offshore exposure for your investment portfolio, the decision to invest overseas isn’t just a knee-jerk response of “offshore is better.”
Sound investment principles behind moving a portion of your investment portfolio offshore
From a financial planning perspective, offshore investment exposure is about the age-old principle of not having all your eggs in one basket. Simply put, by having an offshore investment, you will either be better off or worse off than having all your investments locally.
This is the basis of diversification – to add greater certainty to your overall outcome by hedging your bets.
Specific reasons to consider offshore investment exposure
Stock selection/investment choice
Shrinking local numbers, according to Businesstech.co.za the number of companies listed on the JSE has decreased from 776 to just over 330 in the past 30 years. That statistic speaks for itself. There are simply fewer and fewer listed investment options available within our own borders. More choice ‘out there’ per sector – offshore markets open up greater choice in relation to different sectors. For example, if you identified telecoms as a sector worth investing in, in South Africa your choices would be limited. If you went offshore there would be many more companies to consider investing in within the same sector.
Asset-liability matching
South Africa is a net importer of goods and services. This has an impact on you day-to-day as a consumer because your household budget (food and fuel make up a large portion of our outgoings) is affected by foreign currency values.
This can be true for planned future ad hoc expenditure, too. If you plan to make purchases such as overseas travel, imported vehicles or any other expense that is denominated in a foreign currency, having offshore investment exposure can hedge the effect of exchange rate differences.
By obtaining your offshore exposure ahead of time, you mitigate the risk of poor local economic conditions and a weak exchange rate.
Country or continent
By investing abroad, you can select amongst multiple countries and consumer sets which bring with them varying fiscal, monetary, economic and inflationary prospects. Again, this is a sound way to ensure that not all your assets are exposed to the same risks and that when one area performs badly, there is likely another that makes up for it by performing well.
Certainty of outcome
The likelihood of successful financial planning depends on you adding as many outcomes certainty as you possibly can. In the absence of a crystal ball, you invest in multiple asset classes (Cash, Bonds, Property, Shares) as opposed to just a single asset class.
One then also invests in multiple companies/shares as opposed to just one single stock.
You then further diversify your investment exposure geographically to ensure you are not exposed to any single, political, economic, or natural disaster such as an earthquake or volcano.
In short, diversifying into offshore investment markets can reduce your investment risk
And reduced risk means an increased likelihood of achieving a positive investment outcome (and meeting your financial planning goals).
By Gareth Leonard, CFP® CA(SA)
