Over the last couple of weeks, the old-age debate about offshore investing versus local investing raised its head again, leading to many comments and much debate.
A reader emailed me and challenged my previous article written in September 2021, which I believe he misread. He asked me what my opinion was now that the rand has depreciated to R19.00 from R14.30 at the end of 2021. The reader asked if I still maintained my opinion that offshore exposure should be limited in living annuities.
So, if anything, an SA-biased portfolio would have done even better during the year following the Covid outbreak. Since then, the S&P 500 has done very well. But like I said, let’s forget market returns.By April 2021, the rand had strengthened to R14.50. That equates to a portfolio loss of more than 23% in a single year. Add a drawdown of, say, 7%, and the loss increases to 30%. Remember, if the rand strengthens, your offshore investments lose value in rands.
The situation mentioned above is not limited to 2020. Since 2001, the rand’s value has fallen to all-time lows, only to recover by more than 25% from those lows at least four times. Ironically, these were also when a significant amount of funds left the country for better investment opportunities offshore. Unfortunately, every time this happened, there were financial casualties.
This is not because offshore assets are bad but because the rand is one of the most volatile currencies on the planet. The more you expose yourself to that volatility, the worse your outcome may be when you draw income against the investment, especially when the rand strengthens. I am not forecasting a strengthening rand; I am merely commenting.From the above table, it is clear that I have no problem taking 100% offshore exposure in a living annuity if you are drawing 2.5% per annum.