Question

A lot of my friends have been talking about a potential financial crash in South Africa and that we should move all our assets offshore. I am scared that we may end up with a situation where all our assets become worthless and that we have to start again. What should I do?

Answer

There has indeed been a lot of speculation at social events about the economic problems that South Africa is facing.  It is important that you do not make any rash decisions based on fear.  What you need is a robust financial plan that is able to withstand any kind of event that is thrown at you.  The plan should be able to handle a major crisis in South Africa.

I favour a balanced approach that limits your exposure to particular assets and spreads your investments across different asset classes.

I have written on several occasions that you should not have your all your assets concentrated in one country. South Africa represents a very small part of the world economy and the number of shares available on the JSE represents a fraction of what is available offshore.  By investing offshore, you are reducing the concentration risk of having all your assets in South Africa.

The next question is what percentage of your wealth should be invested offshore. I have seen several studies which indicate that the optimum mix of investments between South Africa and offshore would be to have between 25% and 40% of your assets physically located offshore. 

Besides reducing the risk of having all your assets in one country, you should also get the benefit of good growth with the additional kicker of benefitting from the depreciation of the rand against the dollar.

The table below shows the performance of the global equity market with the returns converted into rands compared with the South African equities:

As you can see, with the help of the rand depreciation, an offshore equity investment has been the best performer over the past 5, 10 and 15 years.

Now before you go and move all your money offshore, take a look at the performance of these two asset classes last year:

Offshore investments lost money and the local investment made money.  This is why I favour not having all your eggs in one basket.  By spreading your investments, your personal wealth would not have been as badly affected by the Ukraine war and crisis in China than it would have been if all your assets were offshore.

A balanced approach should help reduce the risk of events outside of your control impacting on your financial wellness.

So, if you have less than 25% of your assets physically offshore, you should consider moving some of your investments offshore.  You and your spouse are each allowed to move R1 million offshore with relative ease. If you don’t have any offshore investments, it probably be a good time to make use of your annual R1 million allowance before the end of December.