YOUR MONEY: How safe are offshore equities as a long-term investment?

Question:

My children are very young, and I’d like to invest directly in shares. But South African stocks have performed miserably lately. How safe is it to invest offshore and what should I look out for?

— Anonymous

Answer:

The client’s need is the departure point when deciding on an investment solution. Given the reference to young children we can assume that the need is longer term and most probably local in nature; that is, sending your kids to a South African university in the next seven years or more. 

So a growth-orientated portfolio is preferable. The portfolio would be primarily exposed to equity with smaller allocations made to other asset classes, such as bonds and cash, for diversification.

It is important to appreciate that the longer time horizon necessitates taking more risk and you can expect significant volatility throughout the investment term.

For example, you could easily see returns of about 20% over 12 months, but that moderates notably over longer time frames. Losses become far less frequent and returns generally range between 0% and the double digits.

In respect of South African equity performance, 2023 has been a very volatile year but the market is up about 6% year to date and almost 20% over the past 12 months. Longer-term performance is also strong, with 16% returns over three years and 9.6% per year over the past five years.

I would suggest taking a longer-term view of equity performance given how much it can change in a short space of time. Offshore investment as part of the overall solution is advisable as it provides exposure to a broader universe of economic markets and environments. The currency overlay also provides a diversification benefit as relative rand weakness during periods of turmoil then benefits the investor.

When targeting long-term growth there is a great deal of volatility. Contractions in capital value of 20%-25% are not uncommon and you need to have the patience to see out these periods of turmoil to benefit from the 20%-25% growth when markets recover.

This applies equally to local and offshore investments, though the range of offshore options is significantly wider. Investors should consult a qualified adviser to help guide them with solutions aligned to their financial goals and to manage their journey throughout the investment term.

— Renzi Thirumalai, chief investment officer of FNB Wealth & Investments

We want to hear from you! Send questions to yourmoney@fm.co.za