Reader's Questions Answered: Gold, All-weather portfolio and should I invest offshore or locally?
Updated: May 21, 2019
What is your reasoning for not having any property, commodities or bonds in your portfolio?
My personal asset allocation is structured as the below picture illustrates:
For me, the purpose of ETF investing is to perform as the entire market performs. Therefore I do not want increased exposure to any specific sector. I want exposure to that sector as it naturally occurs in the market.
This is why the majority of my ETF investments are in just one ETF, the Satrix World ETF, and this will be the sole focus of my investing going forward as I try to reduce my exposure to my investment property, and my SA Inc focused pension fund and retirement annuity (which is also giving me the above bond exposure) and therefore increase my offshore investments.
In my experience the more ETF’s we add to our portfolio the less chance we have of achieving the goal that in the end we want to achieve. We essentially end up diversifying ourselves out of achieving our investment objectives by increasing weightings to niche sectors and increasing the likelihood that we will fiddle with our investments in the short-term.
Do yourself a favour and play the investor challenge game on https://theinvestorchallenge.com/ it is no coincidence that only 4 out of 39 investors are currently performing the same or better than the S&P500 Index.
Commodities such as gold are in my mind a whole separate issue. These are what Warren Buffett calls unproductive assets. They generate nothing, and are only worth what the next person is willing to pay for them. This is different to a business which produces an output that can be measured and valued, and the business can turn those outputs into a profit which can be distributed to its owners (a productive asset which is always working for you in the background while you sleep). Buying commodities is generally pure speculation and in the long run you would have made a fraction of the return that you would make investing in businesses.
Have you ever had a look at the all-weather portfolio by Ray Dalio – what are your thoughts?
I had never heard of the “Ray Dalio all-weather portfolio”. For the readers the basic premise of the “all-weather portfolio” is to create an investment portfolio that will perform in all market conditions, this will help to decrease volatility and therefore help you to stay on track without making any silly decisions on the course of your journey. The suggested asset allocation of the portfolio is detailed below:
I feel that this all depends on your ability to manage your own portfolio. Someone who has a very good ability will generally be able to make less emotional decisions in times of distress, and therefore they will generally have higher exposure to shares because they understand that this will outperform a balanced portfolio over their lifetime. This is the state of mind that I feel that I am in, but I do understand the need for bonds and cash (rather than commodities) for someone who is constantly on the edge about market movements or is closer to living off their investment portfolio. I just don’t think someone who is very young should worry too much about bonds or cash other than short-term savings and emergency funds
I am looking to invest in ETF’s monthly - would you recommend that I invest offshore or in South Africa. I would prefer to invest in the vanguard funds. What are your thoughts on the Vanguard funds versus South African ETF’s?
Thank you for your mail. I think the Vanguard funds are great, especially the Total World Stock ETF (VT). In terms of diversification (over 8000 shares in 47 countries) and cost, this is really the Perfect ETF.
Unfortunately the only way to buy these Vanguard ETF’s is to take your money offshore into an offshore broker, which in turn requires an offshore bank account. This is a complicated and often costly exercise and therefore has not been the course of action that I have followed. There has been a new development offered by Easy Equities in this space in which you can invest in Vanguard ETF’s in your USD account by funding your account using their EasyFX tool. There are some higher costs associated with doing this (a minimum fee of $4 on all transfers as well as a cost of 0.20% of the total transfer). Unless you believe that South Africa is the next Zimbabwe I don’t think this is all that necessary.
The closest equivalent to the Vanguard Total World Stock ETF in our market is in my opinion the Satrix World ETF. This is my ETF of choice. It is a dollar denominated ETF which means that you are purchasing this ETF in dollars. This is one of the biggest reasons why investors hold offshores investments, because as the currency moves, so does the price of your investment (essentially you are diversifying yourself away from single currency risk). This is a great way to invest offshore right here on the JSE. The only difference being that at some point you are going to have to trade those investments back for ZAR one day. This is the approach I have followed.
As it sounds like you are fairly new to investing in ETF’s I would recommend that before you even start considering investing directly offshore the first thing that you should do is go and open a Tax Free Savings Account locally. Use this account to buy your first ETF investments (The Satrix World ETF again being a good option here). This is a great opportunity for us locally to combine our offshore investments together with the benefit of tax free investing. I think that this should be your first priority.
Thank you to both readers for their questions. Please feel free to send me a question in the “Ask a Question” page on my website.