Considerations when deciding to trade locally or offshore

Ray Dalio, the Chief Investment Officer of Bridgewater Associates, is quoted as saying “Diversifying well is the most important thing you need to do in order to invest well.” In this article, I consider some important factors to take into account when reviewing your local portfolio and provide some guidance on whether exposure to offshore shares will help you achieve your long-term financial goals.

Should you invest locally or offshore?

There is no one-size-fits-all solution when it comes to investing. At best, the savvy investor knows the importance of investing in shares, as this is the single asset class that delivers inflation-beating returns over the long term.

Depending on the amount you have available to invest, and considering your other local investments, I would encourage all investors to start with investing in shares on the Johannesburg Stock Exchange (JSE). This provides investors with access to inflation-beating returns and passive dividend income that is taxed at a lower level than marginal tax rates.

If you choose wisely, you will also be able to access offshore markets by investing in dual-listed stocks without the need to set up an offshore stockbroking account. Investors who want further offshore exposure can open an offshore account with their stockbroker, which will provide them with access to multiple offshore markets. PSG Wealth offers investors access to 19 different offshore markets, which offers ample opportunity for portfolio diversification.

A 60:40 split (local:offshore) is a good guideline for investors to follow when considering investable assets, but the decision is very personal and will depend on the value of other local investments you may hold (for example, property). This is where a financial adviser can guide you in making holistic investment decisions that take your full investment portfolio into consideration.

What are the differences you should be aware of when investing offshore?

Currency risk is the key differentiating factor when considering investing offshore. Investors who view their investment returns in rands will be impacted by the strength or weakness of the rand, which is why a 60:40 local/offshore split is recommended.

We have seen solid local share returns since the formation of the Government of National Unity, together with a strong rand. Investors who invested offshore and externalised rands at R19.50 to the US dollar (a rate seen last year when we experienced stage 6 load shedding) are seeing their overall rand investment returns depleted.

It is thus important for investors to understand how the rand’s volatility can impact overall portfolio performance.

Another key difference between investing locally and investing offshore is that offshore investors can access shares that are not available on the local exchange. For example, the ‘Magnificent Seven’– Apple, Microsoft, Alphabet (Google’s parent company), Meta, Nvidia, Amazon and Tesla – have all delivered strong results for more than five years, and have delivered handsomely for investors.

Key considerations for constructing offshore share portfolios

As is the case when constructing a local portfolio, ensure you diversify your offshore portfolio across various sectors. It is tempting to only want exposure to the Magnificent Seven or the tech-heavy Nasdaq, but this will add to the volatility of your portfolio.

Ensuring that your portfolio is well balanced across sectors will help to counter this. In addition to these considerations, make sure that you are aware of the different fees, as this will impact your portfolio’s performance.

Conclusion

Investors in shares will be well positioned to benefit from capital gains over the long term. Ensure you understand the importance of having access to locally listed shares and, assuming you have sufficient capital to achieve adequate offshore diversification, offshore listed shares as well.

A portfolio that is diversified across market and currency risk will be well positioned to earn passive dividend income and capital gains over the long term and provide the investor with the ability to achieve their financial goals.

Frequently Asked Questions (FAQs):

Why is diversification important in investment portfolios?

Diversification helps reduce risk by spreading investments across various asset classes, sectors, and regions, allowing for more stable returns over time.

What is the recommended local-to-offshore investment ratio?

A 60:40 split between local and offshore investments is commonly recommended, but the ideal ratio varies based on individual financial situations and existing local investments.

What are the benefits of investing in local shares on the JSE?

Investing in local shares on the Johannesburg Stock Exchange (JSE) can provide inflation-beating returns and access to passive dividend income with favourable tax rates.

What should I consider when investing offshore?

Key factors include currency risk, access to global markets, and the availability of shares not listed locally, such as major tech stocks like Apple or Microsoft.

How does currency volatility impact offshore investments?

Currency fluctuations can significantly affect the returns of offshore investments, as changes in the strength of the rand can either enhance or reduce overall portfolio performance.