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Risky or responsible: How much should you spend on forex?
MandyP
Community Coordinator
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We hear from experts what to consider when buying forex and investing it offshore, depending on your strategy.

 

Investing offshore is one way to live out the idiom “never keep all your eggs in one basket” when it comes to your finances. Having a diversified portfolio means spreading your investment risk across countries, companies, shares, cash, debt and currencies, as an example. Thanks to apps like Shyft, you can seamlessly buy, send and store forex and, pretty soon, invest offshore right from your mobile phone 24/7.

 

Investing in forex is investing in cash

 

Dean Lund, a certified financial planner (CFP) and regional head of investment at the Hereford Group, says investing in forex is investing in cash. Cash is a poor investment at the moment, irrespective of the currency, because interest rates are low, globally. Money market funds are currently paying in the region of 3.5%, which means you aren’t even beating inflation. Many investors are disinvesting from money market funds because they are no longer attractive.

 

Lund says the problem is that some people sit on cash. “They don’t invest, they prefer cash because of the depreciation in the rand against the dollar,” he says. “This makes them fully reliant on rand weakness to make money. But it’s not wise, long term. For example, the rand is now where it was four or five years ago. If you went in four/five years ago, and bought your money back now, you would get out what you put in – meaning you’ve actually lost money [due to inflation].”

 

Lund says Shyft is great for converting your rands into forex and then moving your hard currency into an offshore investment. “It’s ideal because you go directly into your investment, instead of having to go into the bank to make those payments. You can do that yourself via the app.”

 

One size never fits all

 

When it comes to the question of how much you should invest offshore, there’s no one-size-fits-all answer. “It comes down to your individual financial plan,” Lund says. “It’s part of the discussion as to the percentage of your portfolio that needs to be offshore.”

 

“If you’re in SA and your liabilities are in rands, you need a pool of assets that generate an income for you to settle your rand liabilities. You don’t want to have to move money from your offshore investment, bringing it back to rands, because that makes you subject to fluctuations in the currency,” he says.

 

If you buy forex when the rand is weak and convert it back when the rand is strong, you lose. Yet that’s what most people do: when things are bad, the rand depreciates, and instinct drives the need to herd money offshore. As soon as things start looking up, they bring their money back when the rand is strong, and in doing so, they lose.

 

It can make sense to have a sizable holding in a particular foreign currency, if, for example, you spend a lot of time overseas or live like a swallow – spending half the year here and half abroad. In those instances, having half your money in a foreign currency and half in rands makes sense.

 

Unfortunately, at the moment there’s a lot of fearmongering at play, amid talk of prescribed assets and fear of the economy plunging into the depths. Fear is never a good reason to invest.

 

Many people who are members of a company-sponsored pension fund or a retirement annuity don’t realise that they have exposure to offshore investments by virtue of their being invested in a retirement fund. In terms of regulation 28 of the Pension Funds Act, retirement funds can invest up to 30% of assets offshore. This gives you an element of diversity in your

investment portfolio.

 

Funds invested offshore in this way are effectively a rand hedge only, and ultimately they are returned to you in rands. Purchasing foreign currency and investing it directly offshore through Shyft will provide you with the option of leaving your portfolio offshore and in hard currency.

 

Owning a basket of different currencies spreads risk, much like having numerous shares or ETFs in the equities world – less risk if one of the currencies performs badly, says Brett Duncan, head of retail equities at Standard Bank. For many, the main focus is dollars, as this is the global reserve currency. However, an allocation of pounds, euros and Aussie dollars spreads the risk. “So you could look at half in dollars and then the other half spread equally between the three other currencies,” says Duncan.

 

Another way to look at it over the long term is to use your dollars to buy ETFs. “The ETFs are bought in the US, but the exposure is to the other major markets, be they in Europe, the UK or Australia,” explains Duncan. “So the ETF, whilst bought in dollars, will have an embedded currency element for these markets. An ETF over the UK will go up in dollar value if the US dollar weakens against the pound even if the UK index doesn't move.”

 

Look (and look again) before you leap

 

The taxman allows you the discretion to spend up to R1 million a year offshore, in terms of your single discretionary allowance (SDA). This money includes what you spend on buying currency, investing overseas, travel expenses, and gifts.

 

Brendan Dunn, a CFP at Verso Wealth, says the timing of when to take money offshore is important: when to convert currency and when to invest. “If you’re not using a financial advisor, you could take a phasing approach in this regard to smooth out currency fluctuations and volatility in markets. This could take the emotion, currency timing and market timing out of the equation.”

 

Some believe that one could get a good investment outcome by converting money on a periodic basis (monthly or quarterly for example) and investing on the same basis.

 

At times when the rand has strengthened, the ability to store hard currency on Shyft for later is a great advantage. “It allows you to lock in a good rate now and then deploy the funds when you need or want to. This is relevant for business owners and investors alike as many commodities and essential/expensive goods are US dollar denominated,” says Dunn.

 

Duncan says a good rule of thumb of when to move some money is whenever you have some spare. “For most people, who will never get to their yearly SDA of R1-million, the idea is always to reduce your overall rand risk, which is large because your home and pension funds are all primarily rand assets.”

 

At the end of the day, it is very difficult to forecast what currencies will do in the short term and having a simple way to convert and store foreign currency – enter Shyft – is a distinct advantage.

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