When a pandemic wreaks havoc across financial markets, investors tend to be overwhelmed by anxiety and uncertainty about the future of the global economy. These feelings, coupled with constant negative news, may cause investors to make irrational investment decisions.
The piece of advice to remember during these times is: keep calm, develop an investment plan and stick to it. The same principle applies to investments which include exposure to foreign assets. Sticking to an initial or newly developed investment plan doesn’t mean you can’t take advantage of attractive foreign investment opportunities.
South Africa’s stock market only represents around 1% of the world’s stock market – so investing only in South Africa means you’re missing out on the other 99% of opportunities that may exist out there.
Why invest overseas?
Even with a global recession looming, markets performing erratically and no sign of fast economic recoveries, there are still positive reasons which justify investing offshore. As with any investment plan, it’s wise to have some kind of safeguarding against unforeseen events, such as the Covid-19 pandemic.
Diversifying your portfolio by investing in multiple industries and sectors, located in different regions or countries, can help safeguard and lower the overall volatility of your portfolio. In simple terms, it can reduce the unpredictability in the value of your investments – limiting that up and down movement.
In terms of performance during a global crisis, emerging countries like South Africa have a limited ability to counteract market stress – this means their currencies generally become weaker.
The Rand depreciation can boost your offshore investments when their values are converted back to local currency. To explain this phenomenon – if you invested in the S&P 500*, your portfolio would’ve been down roughly 12% since the start of the year in Dollar terms, but up 19% in Rand terms.
How to start?
You have two options when you want to invest offshore: you can either choose a rand-denominatedinvestment* via a local unit trust* or invest directly in foreign assets by converting your money into foreign currency and then investing directly in a specific foreign market.
Investors sitting on large piles of cash tend to use the direct offshore option, while investors with smaller amounts tend to choose a rand-denominated investment via a local unit trust. The main point to remember is that you don’t need to have millions to participate in offshore investment opportunities.
These rand-denominated investment options are widely available via established financial service providers in South Africa. You can also invest in a rand-denominated fund from as little as R250 per month when you choose to invest in your goals through the 22seven app – simple!
🔤 Words of the Week*
rand-denominated investment – an investment fund which is priced in Rands. The fund invests in offshore assets but you buy in and get paid out in Rands.
unit trust – an investment fund which pools together money from many individuals to purchase various assets. An investor’s share in the unit trust is represented by the number of units they hold.