WORLDVIEW: Alec Hogg vs Magnus Heystek & your investing strategy

By Felicity Duncan.You may have read Magnus Heystek's gloomy response to Alec Hogg's SA optimism. While Alec believes that SA is at a watershed turning point and that the future for SA equities looks much brighter than the recent past, Magnus believes that the bad times will continue and that investing in South African equities today would be a financial disaster..Now, you may agree with one or the other of them, depending on various factors including your particular spot on the general optimism/pessimism scale, your line of work, your family's financial position, and so on..___STEADY_PAYWALL___.But no matter who you believe is right – in fact, no matter which of them is actually right – you need to build an investment strategy today that will flourish no matter what happens tomorrow. After all, you probably want to retire one day. And achieving a decent retirement means putting in decades of hard work, saving conscientiously, and making sure that your savings are being invested in a way that makes sense..So, what should you do? Well, the only answer I have for you is one that will probably make you roll your eyes, but really does get to the heart of the matter: Take diversification seriously..Diversification means putting each of your eggs in a different basket. It means investing across a range of different assets so that if one of your investment goes sour, there's at least a chance that the rest of them will do well..Now, traditionally, a decently diversified investment portfolio may include a few equity ETFs, some money market holdings, some bonds and corporate loans, and perhaps some real estate in the form of a residential home. The idea is that the values of these assets will move in different directions and so losses in one asset class will be offset by gains in another and returns will be smoothed out..But for South Africans, the picture is a little more complex. Consider the image below (original here). It shows the global economy broken down into its component national pieces. .See that big pink slice? That's America. Now look down in the lower right – see that tiny purple wedge below Nigeria? That's South Africa. .A South African investor who diversifies by putting money into SA equities, SA bonds, and SA cash is actually taking a very big bet on a very small slice of the world's investable assets. .(In fact, even an American investor who holds only US assets is taking a big bet on a small slice of the world's investable assets, although the size of the US economy makes it a better bet than the South Africa one.).For a South African to truly diversify, he or she needs to think in terms of this chart. When you look at it, you can easily see the risk of putting all your eggs into that one tiny basket. For South Africans, diversification needs to be as much geographic as it is anything else. .You may own a home in South Africa, and that home may make up a fairly sizeable chunk of your personal net worth. This means that you have a sizeable chunk of your personal net worth in one basket – a basket called SA Inc. You should therefore think carefully about how you want to invest the rest of your money. .SA equities may or may not offer great value and a bright future. But ask yourself, do they help you diversify your portfolio? They obviously diversify it along one axis (equities vs. real estate) but they don't do much to diversify your exposure to SA Inc. .So, perhaps you should consider investing in US equities or European equities instead. That would offer you meaningful geographic diversification. If SA thrives, your house will rise in value and a stronger rand may mean your US equity holdings won't be as good a bet. If SA tanks and the rand slumps, your US equity holdings will look like a stroke of genius and can help offset losses on your house..This is what I mean when I say you need to take diversification seriously. It's not enough to mix a bunch of asset classes and call it done. The point of diversification is to offset risks, and when all your assets are invested in a small market like SA, you have one big, glaring risk – the risk that that whole market will underperform and sink the value of all your assets at the same time. .South Africa has a sophisticated financial industry and there are plenty of products that give you access to a range of offshore assets. It's true, as Magnus says, that there are restrictions on how much of your retirement savings can be held in offshore assets – it's limited to 30% under current rules. But there's no rule saying you can't max out that limit and then make sure that all your non-retirement savings and investments are offshore..No one can plan for all contingencies. But whether you're worried about the future of SA Inc or happily optimistic, you should take diversification seriously and work to ensure that you balance the risks in your investments as well as you can.

WORLDVIEW: Alec Hogg vs Magnus Heystek & your investing strategy

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