It’s widely acknowledged that investing in shares is one of the most effective ways of achieving long-term financial returns and maximising your chances of growing your wealth. While the South African stock market is among the most advanced and efficient in the world, the stocks available to investors make up just 1% of the total world economy.
So, while you can certainly grow your personal wealth by buying and selling shares only on the JSE, to maximise your investment potential you need to consider investing also in markets that lie beyond our country’s borders, says Alan Shannon, executive: Client Engagement, Professional Banking and Small Business Services at Nedbank.
He said that many South Africans still mistakenly believe that offshore investment is either not an option for them, or is a privilege reserved for only the wealthy.
“The truth is that the relaxation of exchange regulations in recent years has put international investment firmly in the grasp of most South Africans. The impact of Covid-19 on our local market has highlighted the importance of exposing at least some of your assets to international growth opportunities.”
Shannon pointed out that there are many reasons why investors who are serious about growing their wealth and managing their investment risk, must consider offshore investment.
“Possibly one of the most important reasons for including international stocks in your portfolio is that doing so offers the potential for enhanced returns when the local market underperforms. It also enables you to reduce your risk by diversifying the exposure of your investments so that they are not at the mercy of one currency or the economic trends of a single country.”
But offshore investment offers more benefits than just performance potential and risk management, the financial expert said.
He said that a well-constructed offshore portfolio also gives you the benefit of additional growth if the local currency depreciates against its global counterparts, and it enables you to access many more investment opportunities, including high-growth-potential industries and businesses that may not yet have a significant presence in South Africa.
Nedbank said that there are essentially two ways in which South Africans can use their R1 million single discretionary allowance yearly limit to access offshore investments.
Your main choices are:
- To invest in rand via an investment provider; or
- To invest directly in offshore stocks in a foreign currency.
The second option requires you to first convert your rand into the currency of the investment and then physically buy it. To do this, you first need to get the necessary tax clearance from the South African Revenue Service (if you are investing more than R1 million) and then open an offshore account, such as the Nedbank Foreign Currency Account.
This allows you to purchase various currencies from around the world and then use that money to invest in offshore assets, the financial services firm said.
A rand-based offshore investment is the simpler of the two options, because there is no need to convert your rand into another currency. Instead you invest in what is known as a ‘feeder fund’ from an investment provider like Nedbank, and they then convert your money into the required currencies and invest into the various offshore assets for you.
But while exposure to offshore investments can be advantageous, Shannon cautions prospective offshore investors against inadvertently shifting the balance of their portfolios too far towards international shares.
“It’s important to remember that if you are invested in any type of retirement fund, it is likely that you already have some offshore exposure,” he said. “Many of the larger listed South African companies you may be directly invested in also earn a significant portion of their income internationally.
“So, when you are working out how much of your investment portfolio you want to expose to global stocks, be sure to keep that existing offshore exposure in mind.”
Shannon said there are subtle differences between the two offshore investment options, mainly in terms of how you access the money, how it is taxed, and the level of research and administration that you may need to do.
“The way you achieve appropriate international investment exposure is less important than simply ensuring that you do – so that you can benefit fully from the potential for lower volatility, reduced risk and enhanced long-term returns that offshore investments offer.”
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