An investment consultant recently commented to me that some of his clients are voicing their disappointment with offshore investments. This is due to the mediocre returns, in general, they have derived from investing in offshore funds over the past three years.
Sure, you could have invested your hard-earned stash with Edward Lampert, of ESL Investments, and helped him on his way to becoming the top-earning hedge fund manager in the United States. Lampert earned a billion dollars last year - and he is only 42. Last year, his fund returned 69 percent (while the annual average return for this fund has been closer to 29 percent over the past few years). Imagine the ways in which Lampert can spend his way out of a midlife crisis, should he ever have one. Never mind one red Ferrari - an entire fleet comes to mind.
The truth be told, if you are invested in the global market index, as measured by the Morgan Stanley World Index, you have gained exactly nothing since September 2002.
If you invested when world markets bottomed out in 2003, you have done a little better: about seven percent a year. And you've had to watch the South African market return 31 percent a year over the same period.
I recall an astute London fund manager, who steered clear of the tech bubble, commenting after the rapid decline in the Nasdaq in 2000 and 2001 that "those gains are gone forever". This is an important mantra for investors. There is only one thing that should influence your decision to stay invested in the shares or funds in your portfolio, and that is the potential for future returns, given your overall situation and your tolerance for risk.
Lesson number one: Yesterday's losses are gone. You have to shove them to the back of your mind and leave them out of the investment decision-making process.
Lesson number two: Before you give those losses a final push into the recesses of your mind, spend a while understanding their nature so that you can learn from them.
Let's take offshore investments as an example.
Depending on when exactly you invested, you could be forgiven for thinking that offshore markets have done nothing - or worse still, have declined - over the past few years.
When analysing the performance of your offshore investments, the first thing to do is to strip out the effect of rand strength from the movements in the underlying investments. I know that ultimately you want gains in rands and so this kind of exercise may seem pointless, but it is important when formulating your decision-making going forward.
A US dollar investor in the Morgan Stanley index (a proxy for global equities) made 16 percent a year over the past three years. That is a good return in anyone's books, given an inflation rate of well below five percent in the US and, for the most part, here too.
Then there is the rand. Against the US dollar, it appreciated by... 16 percent a year over the past three years, wiping out all your gains. So, before you write off a fund or a fund manager, look at the impact of rand strength on returns.
Fees also play a part in determining the level of performance, especially when returns are low when measured in rands. Offshore funds can be more pricey than local ones, and an extra half-a-percent a year in costs can have a significant impact when the overall return, in rands, is zero.
At this point you are probably wondering when I am going to get to mine.
My point is that your main reason for investing offshore should be to diversify into markets that behave differently from ours, thereby adding to the overall quality of your portfolio.
A secondary reason is that offshore funds and companies offer you the opportunity to participate in growth areas beyond the scope of what is available in South Africa, be it a technological or pharmaceutical development, or an economy that is growing faster than ours.
Finally, offshore investments offer a hedge against rand weakness. If that was your main reason for investing offshore, you can't be blamed for not feeling too happy at the moment.
So what to do now? Revisit the motivation behind the structure of your original offshore investment and see if it still applies in the current environment. Have you invested in funds that add diversity to your overall portfolio? Do they still have good growth prospects?
If the answers are "yes", perhaps you should stick to your plan, and try hard to forget about the past.
Finally, recap how much of your total portfolio is invested offshore, and ask yourself whether you have the right mix of local and non-rand assets. Although there is always a possibility that the rand may weaken, by now it should be clear to all of us that our beloved currency is no longer a simple one-way bet.
Investing is a little like changing your eating habits or quitting smoking: you start afresh every day. Wish as we may, you have as much chance of making poor historic returns disappear as you have of wiping out the effects of too many good dinners in a minute. But you can make better decisions going forward.