The smart money is offshore

Thus there is a trade-off between the size of the pay-out and the chance of winning. Greedy gamblers are likely to bank on one number in the hope of winning big.

Ironically, the financial planning industry uses a question very similar to the above example to determine the risk profile of the investor. It reads something like this: "If you had a one out 20 chance of winning R20 000 or a one out of 200 chance of winning R250 000, which would you pick".

In investment theory this is simply termed diversification.

Investors spread their investment across the asset classes of cash, bonds, property and shares, generating a combined return that is lower but more stable.

South African investors are very familiar with the concept of geographic diversification - or rather, offshore investing, which is widely considered to be a swear word nowadays.

The reason for all the unhappiness with respect to offshore investments relates directly to the greed of investors. In fact, let's rather call the unhappy offshore investor a speculator! A true offshore South African investor should be very pleased with the performance of the rand and the effect on their portfolios.

Joe Soap takes out a million
Let's use an example to try understand the unhappy offshore speculator. A few years ago, when the rand seemed a one-way bet, the speculator boldly invested whatever he or she could offshore, knowing that they would earn an additional return each year from the weakening rand.

Thus, in our example, Joe Soap invested R1 000 000 at a R/$ exchange rate of 10:1. He received an offshore investment of $100 000 dollars. His investment at the current R/$ of 6:1 is worth R600 000. The "poor" chap has lost R400 000 and wants nothing more to do with offshore investments or his financial advisor. The reason he is so upset is because he was expecting to have R1 500 000 by now, so he feels his loss is really R900 000 and not only R600 000 - and his greed has now turned into fear and anger!

His neighbour, who is very happy with his portfolio also took out R1 000 000 and received a $100 000 investment. His purpose, however, was diversification and not speculation.

His current dollar investment is also worth only R600 000, but this does not concern the investor, as the investment has performed in line with his expectation and is currently worth $125 000 - the same as Joe's.

Why the difference of opinion with regards to the same performance? Joe's neighbour understands the principle of offshore diversification while Joe was simply speculating. Most South African's with investments abroad should be very pleased with the strong rand and should look past the effect of the currency on their offshore holdings. I say this because the majority of our wealth is invested in rands, our homes, pensions and other local investments. The strong R/$ exchange rate has increased our overall wealth in dollar terms.

So why's Joe miserable?
In the above example, when Joe invested his money offshore, he received an investment of $100 000. At that stage the balance of his local assets were worth R3 000 000 or $300 000 in world terms (R10:$1). Today his offshore investment is worth $125 000 and his other assets are worth R4 000 000 or $666 667 in world terms (R6:$1). His total wealth has increased from $400 000 to $766 667, yet he is miserable because his offshore investment has "lost" R400 000. I think his attitude is more a result of ignorance than greed.

All markets move in cycles, up and down. Smart investors bank profits on the ups and limit losses on the downs. The strong rand has increased our wealth significantly in dollars - we should bank the profits now by diversifying offshore! Ironically, although not surprising, most investors are bringing money back from overseas.

Source: Helderberg.com, Somerset Press, South Africa