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I'm looking for some advice on how to best position myself in an country that faces a volatile economic future in the short/mid term ahead.

Some background:

  • I live in South Africa where our currency has been slammed this year due to poor economic prospects ahead, a bad political landscape, and also less global appetite for risk.
  • The outlook for the country over the short/mid term is very shaky. Things could gradually decline over the next few years (most likely), but even take a sharp turn for the worse...a lot depends on the political scene next year.

I've made some investment mistakes in the past of trying to buy individual stocks (without proper analysis) and have lost a bit of money. I decided recently to sell off the individual shares and rather take an approach of just buying and holding long term in diversified index funds.

Recently I also sold off some of my locally based index funds and re-adjusted the balance of my portfolio to try preserve some of my wealth with foreign invesments. I'm fairly young (early 30s) so my portfolio is fairly aggressive towards equities.

Current portfolio make-up:

  • 10% risky assets (bitcoin)
  • 10% gold index tracker (good hedge for our currency)
  • 41% local indexes & retirement annuity
  • 27% foreign indexes (DBX USA, S&P 500, FTSE 100, etc).
  • 6% cash locally (held in a low interest savings account)
  • 6% cash foreign (USD & GBP)

My main goal is not to panic when things happen but to try stick to a plan.

Questions:

  • What approach should I take to best protect my wealth against currency devaluation & poor growth prospects. I want to avoid selling off any more of my local index funds in a panic as I want to hold long term. Does my portfolio balance make sense?
  • Quite a large portion of my foreign investments have been bought at an expensive time when our currency is already around historic lows, which does concern me in the event that it strengthens in future. What strategy should I take in the future if/when my local currency starts the strengthen...do I hold my foreign investments through it and just trust in cost averaging long term, or try sell them off to avoid the devaluation?

Any advice would really be appreciated. Thanks.

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I suggest that you're really asking questions surrounding three topics: (1) what allocation hedges your risks but also allows for upside? (2) How do you time your purchases so you're not getting hammered by exchange rates? (3) How do you know if you're doing ok?

Allocations Your questions concerning allocation are really "what if" questions, as DoubleVu points out. Only you can really answer those. I would suggest building an excel sheet and thinking through the scenarios of at least 3 what-ifs.

A) What if you keep your current allocations and anything in local currency gets cut in half in value? Could you live with that?

B) What if you allocate more to "stable economies" and your economy recovers... so stable items grow at 5% per year, but your local investments grow 50% for the next 3 years? Could you live with that missed opportunity?

C) What if you allocate more to "stable economies" and they grow at 5%... while SA continues a gradual slide? Remember that slow or flat growth in a stable currency is the same as higher returns in a declining currency. I would trust your own insights as a local, but I would recommend thinking more about how this plays out for your current investments.

Timing You bring up concerns about "timing" of buying expensive foreign currencies... you can't time the market. If you knew how to do this with forex trading, you wouldn't be here :).

Read up on dollar cost averaging. For most people, and most companies with international exposure, it may not beat the market in the short term, but it nets out positive in the long term.

Rebalancing For you there will be two questions to ask regularly: is the allocation still correct as political and international issues play out? Have any returns or losses thrown your planned allocation out of alignment?

Put your investment goals in writing, and revisit it at least once a year to evaluate whether any adjustments would be wise to make.

And of course, I am not a registered financial professional, especially not in SA, so I obviously recommend taking what I say with a large dose of salt.

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You might find some of the answers here helpful; the question is different, but has some similar concerns, such as a changing economic environment.

What approach should I take to best protect my wealth against currency devaluation & poor growth prospects. I want to avoid selling off any more of my local index funds in a panic as I want to hold long term. Does my portfolio balance make sense?

Good question; I can't even get US banks to answer questions like this, such as "What happens if they try to nationalize all bank accounts like in the Soviet Union?" Response: it'll never happen.

The question was what if!

I think that your portfolio carries a lot of risk, but also offsets what you're worried about. Outside of government confiscation of foreign accounts (if your foreign investments are held through a local brokerage), you should be good. What to do about government confiscation? Even the US government (in 1933) confiscated physical gold (and they made it illegal to own) - so even physical resources can be confiscated during hard times.

Quite a large portion of my foreign investments have been bought at an expensive time when our currency is already around historic lows, which does concern me in the event that it strengthens in future. What strategy should I take in the future if/when my local currency starts the strengthen...do I hold my foreign investments through it and just trust in cost averaging long term, or try sell them off to avoid the devaluation?

Are these foreign investments a hedge? If so, then you shouldn't worry if your currency does strengthen; they serve the purpose of hedging the local environment. If these investments are not a hedge, then timing will matter and you'll want to sell and buy your currency before it does strengthen. The risk on this latter point is that your timing will be wrong.

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US Treasury securities are the safest investment. You can buy short term by buying T-Bills. You buy T-bills at a discount to face. For example, to buy a four week T-bill the treasury will take $99.98 out of your account. In four weeks the treasury will deposit $100 into your account. The $0.02 difference is your Intrest on the loan. Compounded over a year (13 four week periods) you get a 0.24% interest. But (presumably) more importantly (to you) you get your original $99.98 back.

Your government cannot nationalize money that you have on loan to the United States Government.

Edit : oops, I dropped a decimal position in my original calculation of compounded rate of interest. It is now corrected.

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