When politics or economic events unsettle us, there is an immediate increase in demand for offshore investments. Sadly, the demand seems to peak at the same time as the rand reaches maximum weakness. I believe financial planners need a structured approach to offshore allocations so that we can provide real help to our clients rather than short-term emotional comfort that might be very expensive in the long run. In this article I share my approach to this issue – it is not perfect, but it has worked for me.
Declaring vested interests
An article about offshore investments should include a disclosure about any vested interests. Most ethical financial planners are sick of the talking heads who regularly beat the offshore drum simply to stoke fear in South Africa so that these talking heads can get more money into their own offshore funds, property schemes or other financial products. In that spirit, I don’t own any local or global investment products and I don’t promote any property or residence schemes to investors.
Methodology trumps emotion
Psychologists tell us that we need a structured framework for our decisions if we want to be rational in difficult times. I believe it is very difficult to be completely calm and rational when the world seems to be falling apart. Consider how we felt when Zuma fired Nene or when Covid hit the world. In these circumstances, it is perfectly natural to be rattled and emotional.
My best decision-making tool in these times is a pre-determined game plan for investments. For instance, at the start of 2020, I felt that the rand was fair value at R15.50 to the US dollar. If it was stronger than that, it was appropriate to send money overseas if it suited the investor’s strategy. When the rand was nearly R17 to the dollar, I did nothing as I felt the rand was too weak.
My best decision-making tool in these times is a pre-determined game plan for investments.
My second line of defense is to have an agreed offshore allocation for an investor based on their circumstances and objectives. For instance, someone who is retired, plans to live out their days in South Africa and has sufficient (but not excess) capital, should allocate 25% of their money offshore. If someone in a similar stage of life has enough money to leave an inheritance, I would increase the offshore allocation to 50%. Finally, a family with sufficient capital to fund two successive generations should increase the offshore allocation to 75% of assets.
These are not rigid benchmarks, but they are useful guidelines for me to assist investors with their planning. There are lots of other factors that could change the benchmarks for a specific client, for instance if they are planning to partially live overseas or if their children want to study internationally.
When the rand is in freefall, I always refer to my fair value and the specific offshore allocation for the investor. I use these guidelines to assist the investor with decision-making to avoid mistakes like sending money overseas at the worst possible exchange rates.
It is inevitable that my carefully structured guidelines are tested by clients when markets are volatile.
Methodology is not Gospel
I read with interest a great piece by Jaco van Tonder from NinetyOne (Taking Stock, Spring 2021) where his team tried to determine the ideal offshore allocation for living annuities. They analysed a range of factors including returns, volatility and drawdowns over various time periods from 120 years ago to the last 10 years. The ideal offshore allocation ranged from 30% to 45%. Given the lousy JSE performance from 2010 to 2020 and the great international market returns over the same time, I was surprised by the findings. I don’t doubt the study, it just illustrates that our intuition and our bias to recent history can overwhelm logic.
I try to review and revise my methodology every year, but I do this when markets and politics are relatively calm, so that I am as rational as possible.
Consider a conversation rather than a debate
It is inevitable that my carefully structured guidelines are tested by clients when markets are volatile. When this happens, I try to have a conversation with my clients about their fears, objectives and the various scenarios that might unfold in the future.
I find it very useful to ask questions like, “What would happen to your financial position if we waited a few months before sending more money out?”
In the past, I would have defaulted to showing them some graphs with fair values, PPP or the Big Mac index. However, this strategy was only 50% effective and caused everyone more angst and frustration until the markets had stabilised.
Asking better questions to understand the core issue is proving more successful.