“I prefer questions that cannot be answered to answers that cannot be questioned” – Richard Feynman.

How much offshore is enough? This is not an easy question to answer, because so many factors may influence the answer.  In this article, I’d like to share how we approach this pressing issue with our clients – an approach we have developed through our academic training combined with decades of experience in offshore investments. 

Let’s start with a reality check. South Africa is not in a good place.  We face many serious structural challenges that define the long-term future of this country. 

These challenges are:

  1. Education – we are failing to provide our children with quality education.
  2. Unemployment – a symptom of poor education and insufficient economic growth, it is especially prevalent amongst our youth.
  3. Work ethic – there is no culture of self-motivated upskilling and working hard to achieve more. Instead, there is a culture of “how can I earn more for doing the same?”
  4. Social unity – poverty and unemployment (especially amongst the youth) is a ticking time bomb. We have already seen an increase in social unrest and it is likely to escalate.
  5. Rule of law & property rights – there is a pervasive disregard for the law and consequences for breaking the law. We need to see clarity on the issue of property rights in order to move forward.

Unless we see policy shifts and strong leadership around these issues, we remain negative on the long-term future of South Africa.  It is against this backdrop that we believe it is important to continue to externalise funds and invest offshore for the foreseeable future.  However, we need to balance political risk with other risks such as running out of money in retirement and having access to your money.

How much is enough?

To guide us, we need to start with an important financial planning concept called “asset/liability matching”.  Simply put, the currency of your assets needs to match that of your expenses.  The “funding bucket” that provides for children’s education, lifestyle and ultimately your retirement needs to be predominantly invested in the country in which you live, in order to protect yourself against currency and inflation movements.  In other words, you do it to protect the purchasing power of your money. As difficult as it is to currently imagine that the Rand may strengthen, history has shown us that there are long periods of currency strength and weakness in all currencies, including the Rand. If all your money is invested in US Dollars and you live here and for whatever reason, the Rand strengthens against the US Dollar, you will become poorer.

If you have a rough idea of what your future expenses will be, you can determine the size of the “funding bucket”. Then ask yourself where you see yourself living in 10 to 15 years’ time?  Where do you see your major expenses?  THIS is where your “funding bucket” needs to be invested!

If it is South Africa, the “funding bucket” gets invested here and within this, you need to ensure that you have a healthy offshore exposure of at least 30%.  If the answer is another country, the “funding bucket” needs to be externalised and invested in a global portfolio over time, preferably in the currency of your future home country. 

What to consider about retirement products?

Pre-retirement structures limit you to 30% offshore exposure. This is the most efficient exposure determined by most mathematical models. However, many South African investments within your retirement products may include offshore elements such as global companies listed in South Africa (for example, British American Tobacco, Naspers). Your actual offshore exposure may, therefore, be more than 30%.