| In nature one of the signs of a robust ecosystem is biodiversity – not only is it common sense, there are plenty of lessons we can learn from that and adapt to managing our wealth. By having that diversity, one event – even a small event cannot destroy the entire ecosystem. We often see the catastrophic effects of non-diversity in agriculture, where a new virus, drought or even lack of bees can wipe out a harvest. Even if there is a catastrophic event – there will be enough diversity for the ecosystem to revive itself, even if it is in a different form. Did you know, for example, that the only way California has become the largest producer of almonds in the world (to feed the voracious appetite of the vegan/vegetarian population’s ‘need’ for almond milk) is through substantial irrigation and by bussing/flying/trucking in bees by their billions from all over the US? This is a potentially high risk to the almond crop, but also for the bees – who suddenly have just one source of pollen. The potato famine (caused by a fungus) in Ireland in 1845 resulted in a mass migration of Irish – many across the pond into the US.  In freshly disturbed soil, which is allowed to do its own thing, you usually see the rapid appearance of so-called weeds. There are two types of weeds – alien invaders who have found a new niche and can quickly crowd out the indigenous plants that have been there for millennia. These are often escapees from gardens – and plants as striking as jacaranda, agapanthus and lantana are cases in point. The other weeds are just local plants that have not deliberately been planted and hence are discriminated against because they are not pretty. When you’ve got a virgin field of wealth, in other words, you have found some funds that can be invested – what should you do? Left to its own devices, or managed by inexperienced investors, they can quickly grow weeds. Diversification of wealth is not putting small sums of money in a bunch of different service providers – making it much harder to track and analyse. If you’re brand new at this game and you’ve got decades to figure out what your wealth ecosystem is going to look like, it really doesn’t matter how you invest, so long as you start early, and make your mistakes early. You might be tempted to go to the top of the food chain and find the biggest hothouse orchid/ new share class/ crypto structure/ meme share of the month. Go for it. Burning your fingers early in your career can be a good life lesson. New ecosystems crash and burn all the time early on – and learn from their mistakes the hard way. If you come to the end of your working life, when that carefully tended ecosystem has to start producing a harvest instead of needing your constant input, then chancing it without experience is going to hurt and you won’t have time to recover. That is why it is prudent to have a game farm manager/trust financial advisor to keep an eye on your wealth biome when you’re busy doing whatever you’re good at so it can thrive. Sure that isn’t going to be free – but I have written another blog on just that topic here  |
| So how to build that diversity and resilience in your wealth ecosystem? Understand the lifecycle and volatility of the various asset classes. In nature, you have short-term perennials that have to be grown from seed every year (but still give you a good harvest like mielies). These are the fixed-income assets in your portfolio. Some have a slightly longer term (and produce a better harvest) than others but can be mixed and matched. In my opinion, this is an underappreciated asset class (especially bonds). Because of their healthy harvest/yield, they are great at producing income in a portfolio, without having to sacrifice capital/ cut down the tree. Even in portfolios that don’t have to produce income (yet) they are good at muting the volatility. If, for example, you have an equity block in your portfolio with 25% upside and downside potential, and mix it, say 50%, with bonds you not only reduce the overall portfolio’s volatility but can also be the beneficiary of the income produced by the bonds. Bonds are not the easiest asset class to understand or access this is where an expert advisor can assist. It is always the downside losses that hurt the most. This asset class mixture is the equivalent of planting legumes (bonds) between your grapes (shares). Even if your harvest fails, you’ll still have your crop of legumes, and if the grapes make it to harvest then you have both – but perhaps both will be more muted because they are competing for nutrients/capital. It’s not all or nothing. ETFs and trackers are a good way of diversifying your share portfolio early on – but there are thousands out there. You can unintentionally get share and sector concentration (Locally and offshore) by buying a simple tracker based on a well-known index (market cap). In a broad global index, you could have exposure to tricky investment locations (like China).  Geographical diversity is another great way to build resilience into your portfolio. This is why birds migrate – to get the best of both worlds. The big question though is where to go to – it’s a big world out there. Making sure your investment service provider has a clear understanding of your current assets and how these need to migrate to best serve your needs is critical . Much like birds have figured out the best destinations, so good advisors can assist in the same role – on behalf of assets. My recommendation is to go back to basics and keep it simple. It’s easier to eliminate geographical locations/domicile first – and most of the RSA-based offshore solutions have done that. It needs to be a location that does not charge estate duty (aka SITUS tax), and has forced inheritance laws and other onerous taxes like wealth tax. In other words, tax agnostic – they leave it up to the offshore investor to declare and sort out their tax (perhaps with some dividends tax being withheld). How stable is the country’s banking system and how often do the regulations change? That will eliminate some of the sexy island nations that have become popular recently. What are the probate requirements? In other words, is the winding up of the investment the prevue of the RSA executor or do you have to have a Will and/or probate officer in the location (common practice in the Channel Isles)? This can add considerable time to the winding up of an estate. Survivor accounts can be handy – the investment isn’t frozen until the probate is complete thus ensuring continued liquidity for the surviving spouse. Having a retail (transmission) and investment account in one is very useful (anyone who has tried to open an offshore bank account will attest to that).  Accessibility is another important consideration. I have never been a fan of locking up money in structures (for which you pay an additional premium) unless you’re very sure you’re not going to need the money. Endowments (on local or offshore platforms) are all very well, but they are not tax-free – they are taxed within the fund at a flat 30%, so tax is withheld, and have additional fees. Do the math before you go that route – is the additional fee and the flat tax really more compelling than a flexible investment? The last consideration when it comes to choosing the migratory route for your funds is the safety of the nest you land in – and this is controversial. If you can, make sure that your offshore nest/service provider is truly offshore. In other words, if you use a well-known RSA FSP (and they all have offshore divisions) and the ruling party in coalition with an even more socialist party (not impossible) decides to halt all forex, and demand repatriation of all offshore funds, what then? We saw it pre-1994. Sure, this doesn’t have a high probability at the moment, and maybe I am biased. In my lifetime I have lived all over Africa, through 3 coup d’états and one politically motivated deportation so I have found that geographical diversification has been a sound strategy for decades. Socialism is all very well – until the golden goose dies and then it isn’t.  I’m not deliberately trying to make this sound complicated, but it might be useful to know where the stumbling blocks are. The trick is to know what questions to ask and find a trusted partner who will be transparent and tell you about the good, bad and the ugly. For example, we have chosen Switzerland as our location of preference for migrating funds. They have a long history of neutrality and are tax agnostic and the critical mass required is often lower than for other offshore investment platforms and is a good next step after using Rand Denominated funds. There are of course many other solutions – now you know the questions to ask. Articles and Blogs: Why do I need a financial advisor ? NEW Costs Fees and Commissions The NHI and what do do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |