Five global investing tips to diversify your currency

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.

Instead, investors should focus on getting enough offshore exposure for the sake of currency diversification - which, along with geographical diversification - reduces overall portfolio risk.

What is currency diversification?

Nasdaq defines currency diversification as 'using more than one currency as an investing or financing strategy.' Buying assets in different currencies lessens foreign exchange risk, grows your offshore exposure, and lets you take advantage of disparities in exchange rates.

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.

Five tips to keep ahead of the currency curve

You can diversify your currency exposure through the JSE, in stocks with a large portion of their earnings offshore, or through a local investment, in a rand-denominated global investment fund. However, investing offshore is especially valuable in that, if structured well, you won't need to pay capital gains tax on rand depreciation on your global investment.

Here are five 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, 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. Focus on balanced currency diversification

Yes, the rand has been on a trend of depreciation against currencies like the US dollar and British pound. But comparing South Africa's emerging-market currency to these is not really fair, as developed market currencies are naturally more stable for a number of factors, including wider use. Volatility in a currency that's very small, relative to other currencies in use in the global market, is to be expected.

3. Consider rand-cost averaging

This basically means gaining 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.

4. Look out for innovations in the industry that offer value-add propositions

Discovery's unique exchange rate enhancer, for example, allows clients to buy in at much lower than the prevailing exchange rate on qualifying investment choices.

5. Regard your money abroad as a 'new pot' of wealth, and judge its performance accordingly

Although your international assets form part of your overall portfolio, it's sensible to evaluate its performance more broadly against the foreign hard currency in which you invested, and not in terms of the rand conversion. This is because, due to lower rates of inflation abroad, comparing your returns to that of your local assets in a local currency would be misleading. In addition, the extreme volatility of the rand will create large fluctuations in the perceived performance of your offshore investments.

As with diversifying your portfolio's exposure across different assets, industries and geographies, currency diversification works to protect your long-term wealth by reducing the overall volatility of your investments, while enriching expected returns.

This article is not financial advice. Please consult with a financial adviser for financial advice.

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