Honest Money
Honest Money
Earning Dollars & Investing Smart: All Country World Index vs. MSCI World Index Explained
In today's episode Warren Ingram answers your questions about the principle of earning dollars and where to invest the money. Warren speaks to keeping investments in the currency in which they were earned to avoid conversion costs, the importance of diversification and the All Country World Index versus the MSCI World Index.
Takeaways
- Keep investments in the currency in which they were earned to avoid conversion costs.
- Diversify investments and avoid solely focusing on the American market.
- Consider investing in the All Country World Index for global exposure.
- Choose a low-cost global platform for investing.
- Consider adding the top 40 index for a diversified portfolio.
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The Honest Money Podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.
Speaker 2:G'day Warren. I hope you're well. Firstly, I want to thank you for your podcast. It's very insightful and I've learned a lot. I started from episode one back in 2020 and worked through it quite quickly. I'm almost finished with 2021 now and, yeah, I'd love your advice.
Speaker 2:So just a bit of background um started working last as a professional and then just paused my professional career and came overseas to the yachts. So I'm currently working in america and earning in us dollars. Um. I started with my tax free savings account last year already even started working and then also started an ra with the company. So debit orders goes off every month. I max out my tax free savings as well, um as a debit order on my ra. I just want advice on the taxfree savings account. Currently I'm just buying msi. Well, or until now I've just been buying that, but I've heard in a few episodes you're talking about buying emerging markets and jay's e top 40. So I'm in it for the long run. Um, I'm not looking for short-term investments, I'm just buying monthly and not even looking at it.
Speaker 2:Would you suggest I buy jay's e top 40 um in my tax free savings account? Um and emerging markets together with the msci world, or just keep it msci world and let it go on. What would you recommend then? Also, since I'm earning in dollars, um, I've got quite some extra capital to invest. I don't know if I should keep it in dollars and put it in my easy equity usd account and invest in the s?
Speaker 2:P 500 and a lot of books I've read and podcasts I've listened to. They people are saying just buy s? P 500 and keep it, s&p 500 and keep it. I know the MSCI world and the S&P 500 they correlate quite a lot. It's basically the same companies. But yeah, but in my only I'm only buying MSCI world in my tax frame. So should I keep it in dollars and, on the side, buy S&P 500 as well? Or what would you recommend I do? I can also just convert it over to RAND and just put it in a normal EasyEquities account and buy JSE top 40 there, or? It might be a bit confusing this question question, but I hope you can help. It'll be good to hear from you. Thank you so much again for the podcast. It's amazing and keep well.
Speaker 3:Welcome to Honest Money. It's Q&A time again and we've got the most fabulous question as a voice note. Thank you very much. I'm going to call you the yachtsman because I gather you said you're on the boats or the yachts in the States. Well done, that's great.
Speaker 3:It sounds like a heck of a way to make a living for a while. So let's just talk about firstly the principle of earning dollars and was do I take the dollars, bring them back to RANDs and then buy the JSE, the Emerging Markets Index and the World Index, or do I take dollars, keep dollars and then buy the World Index or the World Index and all the S&P 500? So let's just talk about the currency for a second. I think it always costs money to convert currency. So you know, if you don't have to try and keep your investments in the currency in which you've earned them. So if you've bought, if you've got dollars because you've earned dollars, then rather use dollar based investments. So don't worry about bringing the money back to South Africa to convert and go through that whole process, rather use dollars to buy a dollar based investment. So I think it sounds complicated when you kind of pose it in your question, but I think just simplicity is strip out as much of the cost as you can, keep your currencies as similar as you can, and then don't worry too much about the Euros or the Chinese currency or the Japanese currency or whatever. And I always think if you're earning dollars, it's the world's biggest currency and investing in dollars doesn't mean you're only investing in America. If you buy the world index, you're buying companies right across the world. You're actually getting an allocation to currencies across the world, so the fact that it eventually gets priced in dollars doesn't matter to you. Now, if the dollar implodes one day because you get Donald Trump becoming president and he does some stupid stuff, the reality is that the investments that you own in the UK or Europe or Japan or whatever will be worth a lot more dollars. So you'll be making money. Don't worry about the currency. I think it's fine. One currency for a very diversified exchange-traded fund makes all the sense in the world to me. So maybe that simplifies life a little bit for you on the one side.
Speaker 3:On the other side, I think choosing between the MSCI world and the S&P 500, it is a bit tricky because we've gone through a decade where the S&P 500 has performed incredibly well, it's done much better than pretty much every other. You know index around, and so the people that you know drive their cars at 120 k's an hour forward. But only look in the rear of your mirror. They're going to tell you buy the S&P 500. You know it's done so well. So they're telling you about what has happened. Buy the S&P 500. It's done so well. So they're telling you about what has happened Now.
Speaker 3:What has happened is no guarantee of what's about to happen next week, next month, next year. So sketch the scenario where the Democrats and Republicans drive their country to a standstill. They don't extend the federal budget. The country grinds to a halt. They can't pay their bonds. They don't extend the federal budget. The country grinds to a halt. They can't pay their bonds. And then tell me that America is going to be a great investment for the next decade. I mean, I'm not saying that's going to happen. I'm just saying there is a real chance that politics could drive America into a wall completely unnecessarily.
Speaker 3:So I think worrying about the past and using that as the purest indicator of the future is really not smart. Back to my example of you know. Get into your car, drive at 100 k's or 120 k's an hour on a windy mountain road, but only look in the rearview mirror and tell me that you're going to get to the bottom of the road. You're not, and that's what people do when they look at past performance only as a way of making the decisions about the future. So I think you're gathering. I like the American index, I like the American market. I think some of those companies I mean when you talk about Apple or Microsoft or whatever it is those big multinationals listed on the S&P 500, they are not pure American companies. They don't only operate in America and sell to Americans in the US. Microsoft sells to everybody around the world. I'm using Microsoft right now and I can promise you I'm not in America.
Speaker 3:So I think it's not that you're taking a bet on the US only when you buy the S&P 500, but you're taking a much more concentrated view on America and there is a very good chance that Asia, whether it's India or maybe China, restores itself, or maybe Vietnam or maybe Indonesia or maybe Japan, become like the next sort of powerhouse for the next decade. And you've got all your money in America. You're not going to participate in that. So the reality is, we need to be humble enough to say we don't know what we don't know. We don't know what's going to happen next week. We can't even get an app that can reliably predict the weather. How on earth can we predict what's going to happen in markets?
Speaker 3:So taking a very specific view on just the American market, I think is too specific. Rather, buy the world. I think the one thing to think about is whether you buy the MSCI world or you buy something called the ACWI, the MSCI All-Country World Index. My preference would be All-Country World Index because it includes emerging markets as well. Unfortunately, the World Index doesn't include emerging markets, which makes it a stupid name, and so they had to innovate and they came up with All-Country world index, which is the one that actually is the world. So confusing, stupid, but that's the reality, and so that would be the one I would consider buying, instead of just the MSCI world, because it could be that emerging markets are the flavor of the decade. For the next decade they certainly weren't. For the last decade. It was almost like American market very high, emerging markets very low, and decade-long trends don't tend to stay like that for the next decade. What happens is things reverse. So I would be very careful of just taking a US-only view.
Speaker 3:And you sound relatively young. You said you've just started your professional career and then chucked it in for the boats. Relatively young, you said you've just started your professional career and then chucked it in for the boats. So you're not investing for the next decade, you're investing for the next 30, 40, 50 years. And if you're doing that and your time horizon is so long, then you really should be practicing diversification and that's why the All Country World Index would be my preference. How you do that? Where you buy your exchange traded fund?
Speaker 3:I think look for a very low cost global platform, ideally somewhere in Switzerland or in Ireland or Luxembourg or Channel Islands, because if you're a global citizen, you certainly don't want it to be tied to one country. You want to be able to add money and access it from around the world and you don't want that country where your portfolio lives to tax you twice. You want to be taxed once in the country of your tax domicile, not twice. So don't open an account in the US. That's a nightmare, unless you plan to live in America and I think, for the rest, if you decide to come back to South Africa in the next while, then certainly consider adding the top 40 index as well, so that you get a nice spread, because if you're going to spend RANDs, it makes sense to invest some RANDs as well, because often growth rates are higher in South Africa.
Speaker 3:So I think you can worry about that as a step two. But step one, get a global exposure. If you don't want to commit all your money just to the all-country world index, consider a low, low cost general equity unit trust as well. Often then you're paying the fund manager to go and choose those businesses around the world that will deliver good growth for you. I hope that helps. Thank you so much for your questions and enjoy the boats.
Speaker 1:The Honest Money Podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.