By Wendy Myers, Head of Securities, PSG Wealth

Ray Dalio, the Chief Investment Officer of Bridgewater Associates, is quoted as saying “Diversifying well is the most important thing you need to do in order to invest well”. The experienced investor understands the importance of diversification when considering portfolio construction. Diversification is not simply about spreading risk across multiple asset classes and sectors. Investors should also contemplate exposure to local and offshore shares (assuming their risk appetite supports this).

Should you invest locally or offshore?

There is no one-size-fits-all solution when it comes to investing. At best, the savvy investor knows the importance of investing in shares, as this is the single asset class that delivers inflation-beating returns over the long term.

Depending on the amount you have available to invest, and considering your other local investments, investors should ideally start with investing in shares on the Johannesburg Stock Exchange (JSE). This provides access to inflation-beating returns and passive dividend income that is taxed at a lower level than marginal tax rates. If you choose wisely, you will also be able to access offshore markets by investing in dual-listed stocks without the need to set up an offshore stockbroking account. In the most recent PSG Think Big webinar, CEO of the JSE Dr Leila Fourie highlighted that more than 30% of its listed companies are also listed internationally.

Investors who want further offshore exposure can open an offshore account with their stockbroker, which will provide them with access to multiple offshore markets. For example, PSG Wealth offers investors access to 19 different offshore markets, which offers ample opportunity for portfolio diversification.

A 60:40 split (local:offshore) is a good guideline for investors to follow when considering investable assets, but the decision is very personal and will depend on the value of other local investments you may hold (for example, property). This is where a financial adviser can guide you in making holistic investment decisions that take your full investment portfolio into consideration.

What are the differences you should be aware of when investing offshore?

Currency risk is the key differentiating factor when considering investing offshore. Investors who view their investment returns in rands will be impacted by the strength or weakness of the rand, which is why a 60:40 local/offshore split is recommended.

We have seen solid local share returns since the formation of the Government of National Unity, together with a strong rand. Investors who invested offshore and externalised rands at R19.50 to the US dollar (a rate seen last year when we experienced stage 6 load shedding) are seeing their overall rand investment returns depleted. As such, it is important for investors to understand how the rand’s volatility can impact overall portfolio performance.

Another key difference between investing locally and investing offshore is that offshore investors can access shares that are not available on the local exchange. For example, the ‘Magnificent Seven’– Apple, Microsoft, Alphabet (Google’s parent company), Meta, Nvidia, Amazon and Tesla – have all delivered strong results for more than five years and have delivered handsomely for investors.

Key considerations for constructing offshore share portfolios

As is the case when constructing a local portfolio, ensure you diversify your offshore portfolio across various sectors. It is tempting to only want exposure to the Magnificent Seven or the tech-heavy Nasdaq, but this will add to the volatility of your portfolio. Ensuring that your portfolio is well balanced across sectors can help to counter this. In addition to these considerations, make sure that you are aware of the different fees, as this will impact your portfolio’s performance.

Reap the capital gains

Investors in shares will be well positioned to benefit from capital gains over the long term. Speak to a financial adviser to ensure you understand the importance of having access to locally listed shares and, assuming you have sufficient capital to achieve adequate offshore diversification, offshore listed shares as well. A portfolio that is diversified across market and currency risk will be well positioned to earn passive dividend income and capital gains over the long term and provide the investor with the ability to achieve their financial goals, guided by your adviser.