Warren Ingram is a Director of Galileo Capital, hosts the HonestMoney Podcast and wrote the article below. Although different to our view it is important to listen and understand opposing views. We would have liked if he addressed whether South Africa has structurally changed which in my view is the most important question to address before you investigate the risk of investing offshore.
Investing money overseas is always an emotive subject. Some people are desperately fearful of South Africa’s prospects, especially the potential for the country to be the next Zimbabwe. Others are more upbeat and view the current problems as growing pains in a young democracy.
What clouds the issue completely, is talking heads who have their own agenda and provide their “forecasts” for South Africa, so that it will benefit their own narrow interests. With all this noise, how should private investors make decisions about overseas investments, especially when the Rand is in a period of recovery after a collapse?
It is all about you
Decisions about investing should always be made to suit your personal goals and circumstances. It is rarely helpful to be influenced by commentators telling you to “sell” or your friends telling you to “buy” because their circumstances are different from yours. Investing overseas is a good idea for all South Africans but you need to be careful with your choices.
The ideal amount will vary depending on your financial circumstances and future objectives.
I like the following two tables that help me decide what amount to invest overseas:
If you use the tables above to help make your decision about investing overseas, you don’t have to worry about forecasts for the next 12 months because they are useless to you. Anyone who spends 30 minutes reading a few articles could make a great argument that the SA stock market will grow in the next 12 months or an equally good argument for a shrinking SA stock market.
The truth is, no one knows but very few experts are humble enough to tell you that! So, if the experts do not know what is going to happen, then it is more dependable to use your personal circumstances to determine what you should do. That will help you to ignore a lot of the nonsense and focus on a few key factors.
When should you send money overseas?
I think a good target to convert Rands to Dollars is around R17.00 to the Dollar and R20.50 to the GBP. That means if the Rand is near that level or even stronger e.g. R16.70 to the Dollar, you can convert Rands to Dollars. These levels are applicable in the current economic environment and it is worth remembering that circumstances change so the levels might change too. If you need to send money overseas, those are my targeted exchange rates for now.
Worried about the dollar?
I receive a lot of questions from people who are worried about investing overseas in a Dollar denominated investment. They are worried that the US economy might suffer, or they are worried about Trump and many are understandably worried about the over-valued tech shares in the US. It is easy to reduce these risks if you invest in a global portfolio rather than a pure USA investment.
If you select a global equity index tracker or a global balanced unit trust, you will have money invested in various countries and currencies. If the Dollar loses value, it means that the non-US parts of the global portfolio will help improve performance.
Where your money lives
It is really important to know where your investments live. In industry jargon, this is called the domicile of your fund or ETF. Many South Africans want to buy US shares and Exchange Traded Funds (ETF’s) but they do not know about the serious tax implications of this decision. If you live in South Africa and you have $100,000 worth of Vanguard ETF’s or Apple shares (as an example), you are liable for Estate Duty of 40% of your US assets, even though you don’t live the US.
The same applies to assets in England. There are some exemptions for smaller amounts of money, but the point remains, you do not want your overseas investments to live in either of those countries unless you are going to live there. Rather, ensure that your money lives in Switzerland, the Channel Islands, Ireland or Luxemburg – they are sound jurisdictions that do not tax non-residents.
Investing can be a very complicated business, especially when you consider global markets, fluctuating currencies and crazy politicians that can change things in a heartbeat. However, you can simplify your life by focusing on a few key factors that you control and by ensuring that you maintain a well-diversified portfolio to spread your risks.