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THE FINANCIAL WELLNESS COACH

How to protect your investment portfolio from the volatile rand

How to protect your investment portfolio from the volatile rand
Illustration: Vecteezy

Aside from diversifying your investments and seeking equity exposure, investors might want to consider investing offshore.

Question: My wife and I are in our seventies and live off the proceeds of our investments. The returns we have been getting on our fixed deposits and retail bonds more than cover our expenses. Under normal circumstances I would not be too concerned. However, these are not normal times. What can we do to protect our investments from the danger of runaway inflation and the ever-devaluing rand?

Answer: It is important that your investment portfolio is robust enough to withstand the many challenges that South Africa will encounter on the political and economic front. There are several ways to achieve this.

Diversify

It appears that the bulk of your investments are in local fixed-interest structures. Though they are currently doing really well, they are not always the most tax-efficient investments around, as most of the growth will be taxable at your normal tax rate.

If you diversified into other classes of business, you could end up paying capital gains tax, which is a lot more tax-efficient.

Increase your equity exposure

If you are worried about the impact of runaway inflation, then you should not have all your assets tied into longer-term fixed-interest investments such as fixed deposits and bonds.

With these fixed-interest investments, you are locked into a particular rate. This can be a really bad strategy if the inflation rate increases significantly.

What seemed like a great return may end up costing you money once tax and inflation have been deducted.

You should have some of your assets in the equity market. If you choose your shares correctly, they should increase in value if the inflation rate increases.

Move some of your assets offshore

Move some of your investments offshore. It is relatively easy to move R1-million a year offshore. You would convert these rands into dollars and invest them in an investment structure in a tax-friendly country.

In this way, you can protect your investments against any future falls in the value of the rand. I have seen several studies which recommend that you should have between 25% and 45% of your wealth located outside South Africa.

I provide retirement counselling to many people who have children and grandchildren living overseas. They typically plan on spending some time with them. This can be very expensive when you are spending rands. If, however, you have money that is already overseas, you can use that to fund your stay and not worry about the declining value of the rand.

Besides travel, the falling value of the rand impacts on your life in other ways. If you look at what you are spending your money on now, you will be surprised by how many items are affected by the exchange rate. This could range from your Apple and Netflix subscriptions to vehicle parts.

I would recommend that you get your financial planner to draw up a proper strategy. This should be stress-tested under different scenarios, such as the rand collapsing or inflation increasing hugely. Although these may be remote possibilities, it is important that you understand the implications and have enough diversity in your portfolio to withstand these events if they happen. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

 

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