When you decide how to invest, you should start with your end goal in mind in order to ensure that you are not distracted by short-term noise, such as a weakening or strengthening exchange rate or another Cabinet reshuffle.
Goals-based investing, where an investor identifies specific goals and focuses their investments on achieving them, has shifted thinking to considering liabilities, not just assets, when investing.
Investors traditionally have put too much focus on relative performance to the wrong reference points, focusing on indices or peers as their benchmarks.
We are finally seeing a concerted shift by financial advisers and service providers to focus on measuring performance relative to investors’ goals.
Many investors now start their investment process with their goals: how much money do I need for my goal of retiring comfortably, buying a car, or sending my child to university?
Liabilities represent the cash flows of the goals you are aiming to achieve. Although this may be the start of the investment process, the financial planning process must start long before you get to this point, and investors would be well served by seeking professional financial planning advice.
Let’s consider an example. If you plan to retire offshore, investing 100% in South Africa means you will be exposed to the exchange rate at retirement when you need to transfer your money out of the country.
Clearly, you have no idea what the exchange rate will be in the future, so even if you knew how much you would need in the foreign currency, you wouldn’t know how much you would need in rand.
Currency-matching your liabilities means ensuring that if you are going to incur retirement living expenses in a foreign currency, you account for that with investments in that currency, or at least with exposure to that currency.
Investing in euros if you are planning to retire in Europe may be more sensible than having your offshore exposure in US dollars or all locally in rand.
For most South Africans, retiring in SA is a more likely goal and you know your living expenses will be rand denominated. But this doesn’t mean you don’t need offshore exposure.
Consider what a retirement basket may look like many years into the future.
You may think that the goods and services you consume on a daily, weekly and monthly basis are all proudly South African and not influenced by exchange rates.
But with oil priced in US dollars, which affects the price of petrol and diesel, almost everything in your basket has an element of currency exposure.
According to SA’s Agricultural Business Chamber, fuel makes up around 11% of production costs for grain farmers.
The latest petrol increase pushes prices to their highest levels in three years, affecting not only the production costs of farmers but also the transport of agriculture.
Eighty percent of maize is transported by road.
The next important consideration is how and when to invest offshore.
Rand-cost averaging involves investing regularly and building up exposure over time, minimising the impact of price volatility or, as it’s referred to when investing offshore, exchange rate volatility.
Ideally, one would prefer to exchange money into foreign currency when the rand is strong and to bring it back to SA when the exchange rate is weaker.
However, it is almost impossible to time this correctly on a consistent basis.
Rand-cost averaging gives you a disciplined and methodical approach to achieving offshore exposure, without the worry of getting the timing “right”.
Once you have decided to invest offshore, you should simply move money regularly and consistently, and follow broadly the same approach when disinvesting.
Successful investing is often about discipline and patience, and having the control to not panic or change our investment strategy based on market volatility.
Goals-based investing is about aligning your investments with your life. Performance is measured by the progress you have made towards achieving your stated goal. And risk is viewed as failure to reach your goals.
This shift from relative market performance – where the focus is on indices and peers that have no relationship to the goals you are trying to achieve – to goals-based performance can help you stay “true” to your investment objectives and help you achieve financial freedom.
Joao Frasco is chief investment officer at Stanlib Multi-Manager.
This article is part of the December 2017 FundFocus survey, which appeared in the 30 November edition of finweek. Buy and download the magazine here.