Honest Money
Honest Money
Balancing Local & Global: A Guide to Diversified Investing Strategies for Young Investors
In today's podcast, Warren Ingram answers your questions around importance of diversification in investing, particularly for young investors looking to build a global portfolio. Warren outlines strategies for offshore investment, including the use of feeder funds and the implications of currency exchange and capital gains tax. Warren also emphasizes the need for a balanced approach to investing, combining different vehicles such as unit trusts and exchange-traded funds, while also considering tax efficiency and growth potential.
Takeaways
- Diversification is crucial for long-term investment success.
- Investing a portion of your money overseas is essential.
- Feeder funds can simplify the process of offshore investing.
- Understanding tax implications is key to effective investing.
- Investing in index funds can reduce risk and increase returns.
- Start with foundational investments before considering individual shares.
- Monitor currency impacts on your investments.
- Utilize tax-free allowances to maximize growth.
- Plan your investments to minimize capital gains tax exposure.
- Maintain a balance between local and global investments.
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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:Hi there, warren. My name is Michael and I had a question around what would be a good way to optimize personal investing on offshore equity using your single discretionary allowance. So basically, the backstory to this question is that I make my salary every month. I'm 30 years old and that money goes off into my different retirement account, provident pension, various other funds that I've set up for saving and investing. But every month I would like to put across 1,500 to 2,000 Rand converted to US dollars or a pound sterling and then purchase foreign equity to try and kind of get a feel for the market.
Speaker 2:It's also quite fun to sometimes play around with these things, but I wanted to ask you whether you had a suggestion as to what would be the best way to sort of spend that money and what to invest in. Is it better to go for single shares that pay dividends that can be reinvested? Is it best to go for, like, maybe five good ETFs across and just keep buying those for the long-term hold? The long-term goal here is to have increased cash offshore that, if ever I want to perhaps move overseas or live overseas, that I do have that cash available and it's not like I don't have any money that I can just cash in and use at any stage, but obviously the long term goal is to hold and grow that equity. So if you have any suggestions on that, I'd really appreciate it. And thanks so much. I really enjoy your show. I've learned so much through it. I'm not in the finance sector as my background, but really it is fantastic. So thanks very much and keep them coming. Have a good day.
Speaker 3:Thank you so much for your question, michael. It's really a brilliant question. I think a lot of people have the same kind of discussion with themselves, with their families and with their advisors around this offshore investing and what's the best way to do it. So maybe just to start with some mechanics you know, if you're contributing to a tax-free savings account, you're contributing to your retirement funds and now you're building up your other investments and you are young and you've got the time on your side for a long investment career, then diversification is absolutely key imperative here. It doesn't matter whether you think South Africa is going to implode or whether you think South Africa is going to be the best growing economy in the world for the next 30 years. If you're anywhere on that spectrum, you should still be investing a portion of your money overseas, especially when you're young. And my logic is about diversification. We simply don't know where the next big growth economies will come from and where the next big game-changing businesses will come from. We would never have been able to predict that Meta would become a big business or NVIDIA five years ago. There's no way that we would have thought NVIDIA would be as valuable as it is today and equally that Intel, which was the dominant chip maker in the world for a long period of time, is suddenly struggling to survive. So, understanding that life is unpredictable and investment markets are kind of a big picture of that, then diversification, where you add global investments to your South African investments, makes a lot of sense to me, most especially when you are, as you say, 30 years old and accumulating money. So I agree with your strategy. I think it makes a lot of sense and I think a lot of other people are in a similar position, where they're earning a nice salary, they can save some money and now they want to know what next. How do they build up that global exposure? I think just you know, if we look at that amount I've written it down here that you're saying you're going to invest somewhere around 1,500 to 2,000 a month and you want that to be invested overseas.
Speaker 3:To me, I think I would do this in two phases. So it's kind of expensive to take 1,500 or 2,000 rand a month and convert it from rands into dollars or into pounds or into euros or even all three, because you're paying transaction costs every single time you do it. So you're paying the bank to convert your rands into the foreign exchange, then you're paying a transferring bank to get it from your South African dollar investment into then a global dollar investment. And it's an administration pain and, secondly, very expensive because of the transaction fees and those fees could often be kind of $50 to $70 at a time and that's serious money. That could end up being most of your actual monthly amount that you wanted to save. So I would resist doing that.
Speaker 3:What I would do first is I would choose a RAND-denominated feeder fund. So just to explain that, you can choose a unit trust or an exchange-traded fund and in the name it will say global equity feeder fund and what that means is you're buying an investment yes it's in rands and yes you're going to use it a debit order from your bank account and you keep buying it every single month and the unit prices, the value of the investment, will be quoted in rands, but the entire investment will be allocated overseas. So you can choose to buy something that you know if it's global equity, what that means is it's buying only international shares, it's not buying South African shares and it's giving you all the benefit of the diversification. So whatever's going on in those international markets, you're getting the benefit of that. You're also getting the benefit of the exchange rate. You're also getting the benefits of the exchange rate.
Speaker 3:If the RAND goes, let's say, from $17.50 to $20 to the dollar, then your investment would grow just because the RAND has weakened against the dollar. Equally, if the RAND goes from $17.50 to $15, then your investment is going to go backwards. It's not going to grow, it's going to shrink because now the RAND is strengthening. But the same principle would apply when you've got a global investment. You're going to be measuring it in dollars and then you're going to look at that every now and then and convert it to RANDs to see how much you've got. And so your currency impact there of a feeder fund is exactly the same as a global investment.
Speaker 3:So what I would do is I would choose my preferred global feeder fund in South Africa and if you want to do global equities, I think that that makes sense when you're very young and then run your debit order of 1,500 or 2,000 a month, it doesn't really matter and let the investment build up. And when you get to kind of the region of 500,000 to a million rand, then you can send that money overseas directly so you can convert it. You can sell the feeder fund that you've got we'll talk about the tax now convert it and then send the money overseas. And then you know you pay transaction costs at a much lower rate because the amount that you're sending is bigger and you're only sending it once, and then you buy your preferred investment overseas. Now, what would the investment be overseas?
Speaker 3:Well, you know you are asking whether you should buy individual shares or exchange-traded funds or, I'm adding, you should consider unit trusts as well. And I think there it's a little bit about your preference and then a lot about the time horizon. So you know, if you're 30 now and you accumulate this money, let's say by 35, you're sending out your first million. Then you know, understanding that you've got still a long timeframe to go until your retirement age. Then you know, choosing shares as an asset class makes sense. I'm very careful, probably almost want to discourage you from buying individual shares at the start of your investment career. You know, I think you know adding individual shares to a portfolio makes sense when there are five, maybe 10% of the value of your investments. You know, it's the icing on the cake if you happen to choose the right shares and, equally, if you choose the wrong shares and they're halved in value or go to zero. It's not going to destroy your wealth.
Speaker 3:So I think you want to start with the foundational kind of investment and for me that would be a general equity unit trust, so a dollar-denominated global unit trust that invests in global markets, and or a general equity or global index tracker. So you know, we've often spoken on the show about the. You know either the world index or the all country world index and I think that that's a very good exchange traded fund to buy that gives you exposure to the global markets. So for me, when I'm investing money, I don't pretend to know everything about markets. So for me, when I'm investing money, I don't pretend to know everything about markets. I've learned over a long period of time that markets will always surprise me. So I will generally have half of my money in an index and half of my money in a selection of unit trusts or even just one It'll depend on the size of the investments and making sure that if it's equity, then I've got a global equity unit trust and then a world or all-country world index tracker, so that the two work very nicely in combination. And I know that I'm paying a fund manager to avoid the very expensive shares and hopefully buy some more of the cheaper shares, and I'm riding the index with whatever it will do over time. So I think that that's what you do with your money.
Speaker 3:On the other side, as I say, I'm not convinced that you should buy individual shares unless you're really going to spend the time almost becoming a fund manager. If you're going to do the homework every day, every week, every month, every year on choosing and then monitoring your shares, then go for it. But if it's just to learn about markets you know, read about markets. Don't put your hard-earned money into an investment that you know then potentially can halve. I mean, that's a very expensive way to learn about markets. I prefer to invest my money in an index, pay the fund manager as well and then read like mad so that I can continue learning about markets. But I'm not paying very expensive school fees with my capital to do that.
Speaker 3:So that would be on the outside. You know if you're in a particular industry let's just say you're in engineering and you know that there's a German engineering company that's revolutionizing the way that things are working and there's a Chinese company that's copying them like mad, and those are two businesses you can buy. Then by all means, you know, use your specialist knowledge to buy individual shares. You know that might give you an advantage over everybody else, but there's no way that any of us has an advantage in researching Microsoft or researching you know Novartis, or you know whatever it is Richemont. You know there are such big companies that are so well analyzed that there's no way that we know more about them than the rest of the market. In which case let the fund managers do that on your behalf or just buy the index.
Speaker 3:But back to the feeder fund comment. So taking a debit order and buying a feeder fund, what that means is, over time, if the investment does well, you will get capital growth, and so there is the option or the possibility that once you've got to 500,000 Rand, you will need to find out how much of that is money that you've put in and how much of that 500,000 is capital growth money that you've put in, and how much of that 500,000 is capital growth Because when you decide to sell and to send that money overseas, you might be exposed to capital gains tax. Now, you know people tend to make bad investment decisions just to avoid tax, and I'm not one of those. So you know. You just need to understand that every year you can make 40,000 rands worth of profit on your investments before you pay tax. So if you decide to sell and your investment is worth 500,000 rand and you've put in 450,000 and 50,000 rand is growth, and you now decide to sell everything, then just know that the first 40,000 rand of your growth is going to be tax-free, but you are going to pay some capital gains on the 10,000 Rand of growth, and that's maybe part of life and just something you should get used to. The one thing you could do is you could say well, what I'm going to do is I'm going to sell half of my investment, let's say early February, and then I'm going to sell the other half of my investment in late March. If you do that, that means within a period of two months you've sold your investments and you're able to use then your 40,000 Rand for the one tax year and your 40,000 Rand for the next tax year. So you've now managed to capture 80,000 Rand's worth of tax-free growth and then you can send the money out.
Speaker 3:You also mentioned at the beginning of your question the single discretionary allowance. So just to explain, there are basically two ways that we can send money out of South Africa without getting into trouble. The one way is we can send out up to a million rand a year without having to go through a whole tax clearance process. If you do that, you just need to know that it includes your travel allowance. It includes, you know, your foreign online purchases and those kinds of things. So you know, just be careful that you don't go overseas and do a nice holiday. And then you know at the end of the year you send out your million rand and then the Reserve Bank says you've overspent on your million rand a year allowance. So just be careful of that. But beyond that, you can send the money out through your bank or any foreign exchange dealer and you don't need permission. You just need to have the money ready and you can send it out, and that can be a very quick process.
Speaker 3:If you want to send out more than a million rand within a year, then you will have to go and apply for tax clearance, which means you either get your tax person or you do it yourself and you apply through SARS to do up to 10 million rand within a 12-month period. So it's not a tax year or a calendar year. It's just 10 million rand per every 12 months. And in order to do that, you need to prove to SARS number one that you've got the money. Number two, that you earned it legitimately, that you're a taxpayer in good standing, in other words, you've paid all the taxes that you need to and your tax affairs are current. If that's the case, then you usually get that approval within a few days or a couple of weeks at worst, and then you can send that approval within a few days or a couple of weeks at worst, and then you can send that money out. So that's obviously for bigger investors with more capital to go.
Speaker 3:But if you're doing your monthly debit order, then you might not need to do a tax clearance. You might be doing your 500,000 to a million rand a year allowance and just doing it, maybe over two years, so that you get the best benefit of the capital growth that you can get, the 40,000 around a year. And so I think you know, for me that's a strategy that I follow. I like doing monthly debit orders into my investments and then, when I'm ready, I then, you know, sell the feeder investments, the feeder funds and then send that money overseas so that I've always got a spread between South African investments, especially in my retirement funds, my tax-free savings, and then my global investments, to give me that diversification.
Speaker 3:I think that's the question answered, michael. Thank you so much for the voice note. We really appreciate it. I really am grateful for the kind comments that you sent as well. We work hard on honest money to make sure that we're giving you the best information we can. I'm sure we make mistakes along the way, but they're honest mistakes and I'm sure that the feedback we get helps us to correct them as we go. And, michael, please keep the questions coming and please keep listening and please tell your friends about us. Appreciate it.
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.