From the pen of Karin Iten…

Dear Investment Academy Reader,

Statistics show that spreading investments across different currencies, asset classes and industries is an essential and effective way to produce better long-term returns than investing in South African stocks alone.

So this week, let’s look at the advantages of investing offshore and why it’s such a good idea.

Benefit #1: Investing offshore offers you extreme diversification
Today, the majority of investment opportunities are found offshore. These foreign stock markets are growing at such a fast rate, there’s almost limitless potential for your investments. And one of the easiest ways to access them is by using an offshore bank account.

With an offshore bank account, you can invest in almost any security, anywhere in the world – as long as it’s traded on a major exchange. This includes not only ordinary stocks, but also a growing list of foreign ETFs too. Foreign bank accounts give you the ability to maximise the long-term benefits of international currency diversification by getting your wealth out of the rand.

And since, says Personal Finance’s Bruce Cameron, the JSE is heavily weighted towards mining and resources shares, this means we’re very underweight in some of the major industries, including manufacturing, technology and chemicals. By investing offshore, you’ll get access to sectors and industries South Africa doesn’t really have exposure too.

Benefit #2: You’ll pay less tax
Tax havens – now there’s a word I’m sure you’re familiar with. Not only is this one of the biggest reasons why offshore investing has such a notorious image, it’s also one of the greatest benefits for investing outside the country. In a nutshell, a tax haven is a legal jurisdiction, such as a country or principality, where the rate of taxation is lower than in surrounding areas. They’re generally characterised by strong privacy laws, low tax rates and highly reputable banks. They’re also among the most politically stable regions in the world.

Benefit #3: The perfect way to protect yourself from currency fluctuations
Investing offshore (through an offshore bank account, for example) is one of the best ways to access the international markets and diversify outside of the rand. Not to mention, having some money outside of SA is a good way to recession proof your assets. With the rand being one of the most volatile currencies out there, it’s a good idea to shield some of your assets away

It’s important to remember that market commentators believe the overall longer-term trend in the rand is that it’ll weaken against our major trading partners – Europe, America and the UK. By investing offshore, you not only earn returns on your investments but, over the long-term you’ll benefit from the decline in the rand’s value.

Benefit #4: Confidentiality
Financial transparency has reached new heights, and so has the ease of access to your personal data. Yet, investing offshore gives you way to legally lower your wealth profile while energising your portfolio at the same time.

By investing in certain offshore destinations like Switzerland, says economywatch.com, “investors can transfer their assets to legal entities via trusts, foundations and existing corporations. By transferring ownership on paper, investors can save their wealth and property from domestic issues and seizures”. So, if you’re hassled by foreclosures and lawsuits because of outstanding debts, you may want to transfer some of your assets to an offshore country to protect it.

Bottom line: As Andrew Dicks, MD of Illizwe Financial Services puts it: “Whatever the reason for investing offshore, take your time and have a clear idea of what you’d like to achieve (wealth, preservation, insurance or just to take advantage of more choices). If a rand-based investment can’t provide this for you, pick a currency that has a medium- to long-term prospect of appreciating.”

According to financial planner, Henry Van Deventer you should adhere to the following three rules when investing offshore:

#1: Manage your expectations
Find out how your investment is likely to perform and make sure you can live with the losses. And remember, many emerging markets lag the movement of more developed economies like the US and UK so they may be slower to take off when a cycle turn.

#2: Manage your risk
“Make sure your portfolio allows you to change your asset allocation when you need to. Use a proactive asset manager who will pre-empt your losses by switching quickly between asset classes, instead of an asset manager who meets you once a year and says, ‘Oops, you've taken a big loss this year’.” According to most market commentators, like the Association of Collective Investments (ACI), the general rule of thumb for investing offshore is to invest between 25% and 30% of your portfolio outside of the border.

#3: Make sure your investment is tax-efficient
Every rand you save in tax gives you an extra rand in returns. In terms of our current exchange controls, you’re allowed to take up to R4 million offshore. Just remember that depending on how you invest your money, it’ll be subject to income tax or capital gains tax here at home.

Here’s to your financial freedom,

Karin Iten
for the Investment Academy