Selling your rand investments and investing offshore is a risky business and never more so than when the rand loses substantial ground against major offshore currencies, such as the US dollar.
If your investment strategy requires offshore diversification and you need to sell in Rands and buy in US dollars, here are our some of the aspects we would take into consideration
Take a rational approach
The first step to strategically taking money offshore is to acknowledge that the pessimism about our local currency is overdone. Research on consumer confidence levels shows that South Africans are the unhappiest they have been in 40 years. Fear, anger, anxiety and frustration abound—never a good time to make an investment decision.
The future of South Africa
Next, take a step back and consider the three possible scenarios of what could happen to South Africa and its currency.
According to investment advisory firm, Fundhouse’s Peter Foster, there are three potential outcomes for our country:
- SA becomes a failed state; or
- SA reverts to a relatively normal scenario (bumbles along); or
- SA experiences a strong rebound.
While many may believe that SA will deteriorate into a failed state, this is unlikely. A massive rebound may be unattainable right now, but the most likely outcome is that we will continue to “bumble along” in a middle-road scenario, Foster says.
Take a Balanced View
We advise our clients to look beyond recent events that saw the rand weaken to its worst level to the US dollar and consider what could potentially happen in the short term:
- The rand could strengthen significantly:
Historically, the Rand has tended to rebound after periods of severe weakness. We are already seeing evidence of this, with the currency recovering from its weakest point of R19.91 on 1 June.
- The US dollar is still overvalued against all major offshore currencies and is expected to weaken further—which will benefit the rand.
How much to invest offshore
Longer term, the case for diversifying offshore remains strong. However, taking money offshore should not be a gut reaction to bad news, but a considered approach in the context of your overall financial plan.
Be strategic
Once you have worked with your financial planner to identify what percentage of your investments to invest offshore, then move in that direction in increments. There is no need to sell half your local investments and buy into expensive US assets overnight. Be disciplined and strategic.
A sound approach would be to phase out of your rand-based investments and into dollars over a period, which spreads your risk of selling a volatile currency.
If your living expenses are based in rands and you will eventually need to sell all, or some, of your dollar-based investments, then at that point you should also slowly phase out of the investment back into rands.
Conventional investment wisdom states that you should sell high and buy low. Typically, that would mean selling expensive US dollars now and buying weak rands. But, if your investment needs dictate that you should add to or start investing offshore, you can consider buying into global value funds, which are still showing long-term upside.
Another option would be to invest in a global balanced fund which is looking attractive—but remember that neither value funds nor balanced funds are immune to capital fluctuations in the short term.
In a Nutshell…
Decide on what you want to achieve in your portfolio, regardless of what is happening with the rand. Acknowledge that you will not get the timing of any offshore moves right in the short term.
Keep your emotions in check, implement investment decisions in a disciplined way and stick to your overall financial plan.
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