Are offshore investments worth the risk?
There has been a long held belief that offshore investing is a realm only reserved for the super rich and that the average man in the street will never be able to gain access to this exclusive club.
Offshore investments have also been greeted with a degree of scepticism as investors see this as all risk and no upside investment option more akin to gambling than investing.
It is only once you begin to look at the facts that you begin to understand the merits to offshore investing. But to understand this we first need to look at what is offshore investing. Simply put offshore investing can be any investment that is made outside of the country and in a another currency. Thus your money is invested into another economy other than your own.
Why would you want to invest offshore in the first place? Many investors choose to invest a portion of their assets offshore as a means of diversification to spread their risk and not be invested in only one economy or geographic region. Investors also invest offshore as a means to gain access to investment instruments and opportunities that are not available in their local economy. Thus offshore investments can be used as a tool in managing your risk and exposure to one economy and also as a means to generate higher return through investment opportunities not available in your local economy.
In Namibia and South Africa the number of listed shares on the respective stock exchanges are limited to around 400 shares. Investors are also greatly exposed to certain sectors such as resources while having little or no exposure to other sectors such technology and health care.
As with any investment there are risks associated and these risks need to be understood before making any investment decision. One of the biggest risks that investors need to take into account is that of currency risk. This can greatly impact on your investment and can either add or detract value. Although very little can be done to mitigate this risk it still remains important to understand and appreciate this risk when making your investment as it helps you managing your expectations with regards to expected returns.
Does the average investor need to invest offshore? One could rephrase the question in asking can the average investor afford not to invest offshore? Diversification is an excellent way in which risk can be spread and managed. Not only can you diversify by investing in different asset classes such as cash, bonds, property and equity but you should also diversify in the area or economy where you invest. This gives the added protection should growth and return prospects not look as good in your own economy you are exposed to other economies and investment instruments where growth and return prospects are better. Thus from a risk management perspective clients are well served to invest a portion of their assets offshore.
The unit trust industry have made it easy for clients to invest their money offshore. Clients now can simply choose an offshore fund and invest directly in that fund without having to worry about where to invest and how as well as having to gain permission from the relative authorities in taking money out of the country.
Apart from true offshore funds clients can also gain access through multi asset class funds such balanced or inflation linked type funds that also invest a portion of their funds offshore. Investors thus have options at their disposal should they wish to invest offshore.
Asset managers and analysts hold a positive view for investing offshore currently given that the world economy is starting to gain momentum after the global credit crisis in 2008/2009. As economies continue to grow and conditions improve excellent opportunities exist for investors looking for well priced assets in both the developed and developing markets.
In summary offshore investing should be seen as part of a well balanced portfolio based on sound financial advice.