Four global investing tips to diversify your currency exposure
Having investments in hard currencies like US dollars, British pounds or euros, for example, can help even out the volatility of the rand.
Whether it’s a braai‑side debate or a Twitter storm, South Africans are known for their strong feelings about the performance of the rand. But speculation based on short‑term currency volatility is notoriously difficult and extremely risky.
While it’s unwise to try and time the market, global investing can add real value to your portfolio through currency diversification. Investors should focus on getting enough offshore exposure for the sake of currency diversification which, along with geographical diversification, reduces overall portfolio risk.
Having investments in hard currencies like US dollars, British pounds or euros, for example, can help even out the volatility of the rand. And a combination of assets in rands and other currencies will make for a more balanced portfolio as your overall losses and gains average out.
Four tips to keep in mind regarding currencies
Investing offshore is especially valuable in that, if structured well, it can be efficient for tax and estate-planning. Below are four more helpful tips to keep in mind when investing abroad.
1. Don’t let emotional reactions to rand volatility govern your financial moves
Currency volatility is a measure of the frequency and degree of changes in a currency’s value over time. In the world of investing, volatility means unpredictability and potentially more risk. And while the rand is a rather volatile currency, becoming fixated on this can make investors unnecessarily emotional.
On the one hand, it leads some people to take their money out of the country because they are worried about the devaluation of the rand. On the other hand, some investors are concerned that the rand is too weak, and that moving money abroad might result in short‑term losses.
Either of these moves are really attempts to time the market – which is a poor investment philosophy. Research shows this approach has very limited to no success, and in some cases can work against the investor.
2. Consider dollar‑cost averaging
You can get offshore exposure over time through a series of smaller investments, so you average out differences in exchange rates. For instance, Discovery offers a Recurring Global Endowment that allows investors to save offshore monthly in US dollars.
3. Look out for innovations in the industry that offer value‑add propositions
Discovery’s unique exchange rate enhancer, for example, allows investors to buy in at lower than the prevailing exchange rate on qualifying investment choices.
4. Regard your money abroad as a new pot of wealth, and judge its performance accordingly
Your international assets form part of your overall portfolio. However, it’s sensible to evaluate its performance more broadly against the foreign hard currency in which you invested, and not only in terms of the rand conversion.
As with diversifying your portfolio’s exposure across different assets, industries and geographies, currency diversification works to protect your long-term wealth. This is done by reducing the overall volatility of your investments, while enriching expected returns.
To better understand why and how you to diversify your currency, watch this video. Visit Discovery Invest’s offshore investing info hub for a wealth of free resources to help South Africans make more informed financial choices.
This article is not financial advice. Please consult with a financial adviser for financial advice.