Imagine a country with massive amounts of natural resources.
The richest economy in its region.
However, there are signs of trouble, including rising inequality and societal unrest.
To combat this the government is turning to populism by taxing the rich, confiscating assets and dramatically increasing the redistribution of funds to the poor.
This is not South Africa in 2017 I am talking about. It is Venezuela less than 2 decades ago.
Now before you accuse me of sensationalism, please note, I am not arguing that we are heading down the same path as Venezuela, rather I am merely suggesting that the world is more uncertain than many would like to believe.
Don’t underestimate change… And its impact on your investments
This is often referred to as the Black Swan Theory. Developed by Nassim Taleb, the theory proposes that people often underestimate dramatic change.
The financial crash of 2008/9 was one of the more recent and dramatic demonstrations of this.
Banks around the world believed that a dramatic fall in property prices in the US was a once in a 10,000 year event.
10,000 years is an incredibly long time. 10,000 years ago, civilisation was barely beginning and agriculture had only just been invented. A lot can happen in 10 millennia. Yet supposedly intelligent bankers believed that US house prices were only likely to fall significantly just once.
Applying this theory to SA, I would like to ask you to look at your own assumptions.
What percentage of your assets are in SA?
I believe actions speak louder than words, so instead of examining what you think, I want you to look at how you actually behave. To do that we need to look at what percentage of your assets are in SA.
Given the demographics of the Money Morning daily newsletter, most readers own a house and have a pension plan.
By law, South African pensions can place no more than 25% of their funds offshore, so at best your pension is 75% SA based (and likely more). Your house is obviously 100% SA based. This gives you a huge SA bias in your investment allocation.
These investments are, to a certain extent, forced on you. Your house has to be in SA and the tax benefits of having a pension plan makes it too attractive to ignore.
However, after accounting for these, what are you doing with the rest of your funds?
If you are choosing to invest primarily in the local stock market or buy SA based property, then you are assuming that a significant downturn in SA is almost impossible.
If you are comfortable with this assumption, then you may carry on as you are.
The steps to take in the event of severe economic deterioration
If, however, you think that there is a small possibility of severe economic deterioration then there are steps that you can take.
At the moment, getting money out of SA is reasonably easy and cheap.
For amounts of less than R1million the process is almost trivial. Even amounts under R10 million can be done with only a little extra paperwork.
With regards to costs, you will need to be more cautious. Even some of the more reputable financial institutions, like the big banks, are not above overcharging for taking money offshore. As a rule of thumb, anyone who charges more than 10c (South African) for taking a dollar offshore, is likely overcharging.
Going offshore is not a vote against SA, rather it is the act of a smart investor who knows there is no greater risk than putting all your eggs in one basket.
If you’re interested in discussing your options for direct offshore investment you can contact me on firstname.lastname@example.org or call +27 11 781 4454.