Question

The new land expropriation law has been giving me sleepless nights. A friend of mine suggested that I should do as he has done and move all my investments into an overseas bank. Should I do so?

Answer

This is a very big decision, and you really need to think carefully.  I will share a couple of factors that you should take into consideration when making your decision.

Risk

Your investment portfolio needs to be robust enough so that it can withstand the pressures of differing economic and political cycles.  It is seldom a good idea to have all your eggs in one basket and when it comes to investments you should not have all your investments in just one country. 

My standard recommendation is that you should convert some of your South African Rands into dollars, euros or pounds and invest them offshore. 

Countries go through different economic cycles so there will be times when the local market will do better than the offshore one, like it did in 2022 when war broke out in Europe.  There will also be times when the offshore investments will outperform the local one.  By diversifying your investments across countries, you will be reducing the overall risks in your portfolio.

A further advantage of holding assets in different countries is that you will be immunizing yourself against the risk of losing all your assets should the country where all your assets are housed, experience political turbulence or be caught up in a war.

Where will you spend your money in the future?

Many of us have children living overseas and want to spend some time with them on a regular basis.  This can be extremely expensive if we are experiencing a period when the Rand is particularly weak.  A better approach would be to move funds offshore over a period of time and literally take advantage of Rand cost averaging.

If you do not have children overseas but are consuming items that are imported like cars, computers and Netflix, having access to offshore investments can immunize you to an extent against the Rand weakening.

Advantages of offshore investing

By investing offshore, you will have access to significantly more investment vehicles and shares than you will have access to by investing only in South Africa.  You can therefore have a much more diversified portfolio.

If the Rand depreciates, then your investment growth will be improved by this depreciation.  When we take the Rand depreciation into account, offshore equities has outperformed every other asset class over the past five, 10 and 15 years.

Insider tip

Where possible, convert your rands into foreign currency before making an offshore investment. By doing so, you will save on paying capital gains tax on any gains that you have made through the Rand depreciating. 

Disadvantages of offshore investing

If you do not structure your affairs correctly when you invest offshore, your estate could lose a lot of its value should you pass away.  I have written about this at length in the past (eg. Financial Wellness Coach – Estates with offshore assets and how to cut costs)  Suffice it to say that you could lose up to 50% of the value of your offshore holdings in the form of situs tax and probate costs should your investment be incorrectly structured.  Your bank deposit, for example, could fall into this category if it is large enough to trigger situs tax.

Be careful when dealing with offshore banks.  Many of them are quite difficult to deal with as they have sometimes have rules of engagement which do not suit South African conditions.  Some will only accept postal instructions and will only communicate with you in the form of mailed letters.  This is not ideal if you live in a town where the personal delivery service is not fully functional.  It does get worse as I recently came across a situation where a particular offshore bank would only accept a fax from a client.  Again, this can be quite a challenge if you do not have a fax machine or access to faxing software on your computer.

As with most financial decisions coming the solution lies in being sensible and having some of your assets based in South Africa and some based offshore.  The amount that you move would depend on your circumstances and appetite for risk.  What is important is that whatever you do, you must ensure that you make use of the correct structures when investing offshore.