We’ve been spending some time discussing the power of compounding and how to assess critically whether your investment returns are beating your own personal inflation. But, how do we view our financial wealth and whether it’s increasing in value? Do we look at the growth in value over a specified time period, or do we assess what our wealth is from a global perspective?
This might be an alternative approach, but it’s necessary if you see yourself as a worldly citizen. If you’re living in South Africa, holidaying in South Africa and making a life for yourself in South Africa, it’s perhaps not necessary. But if you like going on overseas holidays and want to continue doing so, the onus is on you to consider one’s wealth globally.
I’m sure many might agree that 2016 was not the best year for investments, particularly in the equity space. If I simplistically take my own personal investments in that year, my investment return was just over 2%. That’s less than inflation, which means I actually lost money. But what if I translate my rands into USD? As this was a stationary investment, in other words no deposits or withdrawals were made, I merely need to translate my opening and closing balance with the prevailing exchange rate and re-perform my return calculation. In USD, my investment return is now 15%.
Yes, the movement in the currency has a lot to do with it, but, if I see myself as a word citizen, it seems I’m suddenly better off. The picture is even rosier if I look at my wealth in euros. In that scenario, my growth was closer to 20%.
What does that mean? Well, you’ve got some alternative options available if you want to make yourself feel better, regardless of how the market has performed. Personally, I like to keep tabs on both. In the first instance, I assess my investments and their growth in ZAR, as that’s my primary currency. After that, I convert into foreign currency to see the comparison. So, while I’m trying to keep up (and beat) inflation locally, I’m keeping tabs on what my wealth is looking like globally. It’s a sobering reality check and a useful indicator of whether you should stick with your home bias in South African equity, or perhaps consider some offshore investments.
If you’re intrigued by the latter, there are number of ETFs (exchange traded funds) that track the price and yield performance of indexes outside of South Africa. You can focus on a particular region, or throw them altogether in the world index. With these, you’re making a call on future investment return and the exchange rate. It’s all a gamble really, but it’s good to diversify, no matter the outcome.
There are many variables which influence our daily purchasing power and long-term investment returns. Stretch yourself by not only getting to grips with the local variables, but also international ones that filter down. The ruling exchange rate in particular is a useful little tool that can be used to understand what you’re doing with your investments – and specifically how you view them.
Gizelle Willows, PhD, CA(SA) is Senior Lecturer in Financial Reporting at the University of Cape Town