Spreading your investment risk across countries, companies and currencies makes for a nicely diversified portfolio. And thanks to apps like Shyft, you can seamlessly buy, send and store forex and invest offshore from your mobile phone, 24/7. But as you dive in, keep these facts front of mind.
1. Investing in forex = investing in cash
Dean Lund, a certified financial planner (CFP) and the regional head of investment at the Hereford Group, reminds us that investing in forex is investing in cash. And while cash is one of the asset classes, it’s typically a poor investment, irrespective of the currency, when the interest rates are low. There’s little cash in most multi-asset portfolios. In fact, opinions differ on whether you need to have cash in your portfolio at all – apart from your emergency fund.
According to Lund, the problem is that some people cling to cash. “They don’t invest. They prefer cash because of the depreciation in the rand against the dollar, for example,” he says. “This makes them fully reliant on rand weakness to make money. But it’s not wise long-term. For example, let’s say the rand is now where it was four years ago. If you bought forex four years ago and repurchased your rands now, you would get out the same amount that you put in – meaning you’ve actually lost money [due to inflation].”
Lund says Shyft is great for converting your rands into forex and moving your hard currency into an offshore investment. “It’s ideal because you go directly into your investment instead of having to go into the bank to make those payments. You can do that yourself via the app.”
If you do want to have a small percentage of your portfolio in cash, and specifically forex, then you might want to read our tips in this blog for diversifying your currency holdings.
2. One size does not fit all
When it comes to the question of how much you should invest offshore, there’s no one-size-fits-all answer. “The percentage of your portfolio that needs to be offshore comes down to your individual financial plan,” Lund says.
Let’s say you live in South Africa full-time. “If you’re in SA and your liabilities are in rands, you need a pool of assets that generate an income for you to settle your rand liabilities. You don’t want to have to move money from your offshore investment, bringing it back to rands, because that makes you subject to fluctuations in the currency,” says Lund.
What about if you’re living that swallow life; splitting your year between South Africa and another country? Then it can make sense to have a sizeable holding in that particular foreign currency.
3. Fear is never a good reason to make a money move
You lose if you buy forex when the rand is weak and convert it back when the rand is strong. ‘Sure,’ you’re thinking, ‘but who would do that?’ Plenty of people, as it turns out. When things aren’t going too well in South Africa, the rand depreciates, causing some people to panic about the country’s future and move more of their money offshore to keep it safe. Then, as soon as things start looking up, they bring their money back. But by then, the rand has strengthened, so they lose money overall (and that’s before you factor in fees).
The moral of the story? While you can’t entirely separate emotion from your finances, try your best not to make snap decisions motivated by fear.
4. You may already have offshore investments
Don’t worry if you haven’t got around to investing offshore just yet – because you may already have some offshore assets! Many people who are members of a company-sponsored pension fund or a retirement annuity don’t realise that they have exposure to offshore investments simply by virtue of their being invested in those funds. In terms of Regulation 28 of the Pension Funds Act, retirement funds can invest up to 35% of assets offshore.
That’s a pretty big tick on your portfolio to-do list. But you also don’t want to rely on that alone. We covered direct and indirect offshore investments in this blog. Your retirement fund’s offshore exposure is indirect, and therefore a rand hedge. In other words, even though there is some global exposure, that money will eventually be paid out to you in rands.
A direct investment, on the other hand, involves converting your rands to another currency and putting it into an investment that lives overseas. Shyft allows you to do this by buying forex (at the cheapest rates in South Africa, we might add) and depositing it directly into your foreign investment account, without ever having to leave the app.
5. You have to know your limits
The taxman allows you to spend up to R1 million a year offshore. This limit includes investing overseas, travel expenses, and even gifts. To go above the R1 million limit, you’ll need to apply for special tax clearance from SARS.
6. Timing is everything, so you may want to take it slow
Brendan Dunn, an executive financial advisor at Hewett Wealth, says the timing of when to take money offshore is important: when to convert currency and when to invest. “If you’re not using a financial advisor, you could take a phasing approach in this regard to smooth out currency fluctuations and volatility in markets. This takes the emotion, currency timing and market timing out of the equation.”
There’s an argument to be made for converting money on a periodic basis (monthly or quarterly, for example) and investing on the same basis. At times when the rand has strengthened, the ability to store hard currency on Shyft for later is a great advantage. “It allows you to lock in a good rate and deploy the funds when necessary. This is relevant for business owners and investors alike as many commodities and essential or expensive goods are US dollar-denominated,” says Dunn.
At the end of the day, it is very difficult to forecast what currencies will do in the short term, and time your offshore activities accordingly. That’s why having a simple way to convert and store foreign currency – enter Shyft – is a distinct advantage.
Looking for a simple solution to move your money abroad? You need Shyft.
