South African Investors

South Africans are quickly becoming some of the world's most educated investors. Years ago, they began recognizing the futility of actively managed products. As a result, the country's firms started offering an array of stock market indexes and exchange‐traded funds (ETFs).

Such offerings are a godsend to South African expats looking for offshore investment solutions. Saxo Capital Markets offers trading on the Johannesburg Stock Exchange. When I wrote this book's first edition, trading commissions were 0.25 percent of the invested total or 100 ZAR, whichever was higher.¹ But as I mentioned in Chapter 9, international brokerages play silly games. They move fees up. They move fees down. “Come into our lair,” they seem to say after lowering fees. Then they jack their fees once a sufficient number of new investors have pushed into their doors.

These fee changes, of course, are irritating. But they're not going to make or break your portfolio. Instead, high ongoing fees—such as those charged by offshore pensions—are the culprits that might lead to a retirement spent in your brother's basement.

As I write this in June 2017, Saxo Capital Markets charges purchase commissions of 0.35 percent of the invested total or 250 ZAR, whichever is higher. This is the rate for trading on the Johannesburg Stock Exchange. Rates differ when using different stock exchanges.²

An iShares South African stock index does trade on the US market, but such a product could attract unwanted estate tax when the account holder dies so it isn't worth purchasing.

South Africans Fry Up the Couch Potato

Table 16.1 shows portfolio models for investors who wish to have South African exposure. This would work well for those who plan to retire in South Africa. It provides home‐country currency exposure.

South American Investors

Vanessa Marisa Calunho Lopes Hardinge grew up in Santos, Brazil. She and her husband, New Zealander Michael Hardinge, met while he worked as a teacher in Campinas, Brazil. “I thought about keeping some of our investments in Brazil,” says Vanessa. “I know it's volatile, and I am concerned about the way Brazil is selling out its natural resources to countries such as China. But there's no denying how rapidly South American economies are developing.”

Vanessa is right. Economic output growth for most South American economies has exceeded that of most developed‐market economies. But that doesn't mean its stock market is a shoo‐in for big growth. Emerging markets often accompany high levels of corruption. That's why their stock market growth doesn't always match their gross domestic product (GDP) growth.

As such, investors should go light on such geographic regions. Their currencies often fluctuate, and their stock markets can be subject to some hairy roller coasters.

That said, the iShares MSCI EM Latin American Index (LTAM) is a good choice for investors who want exposure to South America. Its expense ratio is 0.74 percent per year. It trades on the London Stock Exchange. Over the five‐year period ending May 31, 2017, it has lost a cumulative total of 18.71 percent, measured in US dollars. That means a $10,000 investment in this index would have dropped to $7,129.³

But if you've read this book from the beginning, that recent lack of performance should make you drool a bit. GDP growth has soared. But Latin American stocks have fallen. Emerging‐market stocks often battle corruption. But a wide discrepancy like this (between business earnings and stock price levels) won't go on forever. For example, there have been times, in the past, when Latin American stocks have soared through the roof. They will do so again. But nobody knows when. That's why it makes sense to include exposure to this sector and rebalance it once a year.

That said, because such an index can be volatile, investors would be wise to temper their exposure. I've provided portfolio models for South American expats in Table 16.3. Each of these ETFs trades on the London Stock Exchange.

Investors who don't want Latin American exposure might choose to avoid that index and build a two‐fund portfolio comprising global stocks and global bonds.

Investors who would like to invest in a socially responsible index (see Chapter 10) could select the iShares Dow Jones Global Sustainability Screened ETF (IGSG) instead of iShares Core MSCI World ETF (SWDA). It also trades on the London Stock Exchange. The index is listed in US dollars, with an expense ratio of 0.60 percent per year. Conveniently, it reinvests dividends automatically.

Are You Having Troubles Selecting Your Portfolio?

I've provided options above. You might wonder whether to include your home‐country market or whether you would like a socially responsible ETF. First, consider your risk tolerance. If you can handle big annual losses from time to time in exchange for strong gains, select an assertive or aggressive allocation, as listed in Tables 16.1 and 16.2 for South Africans and Table 16.3 for South Americans. If portfolio fluctuations make you nervous, select a cautious or balanced allocation.

It's important to choose a portfolio allocation that suits your time horizon or risk tolerance. If the socially responsible index doesn't wrap your heart with warmth, build a portfolio with the regular, broad‐based global index fund.

Whatever you do, stick to your game plan. Add money every month or every quarter. Don't speculate. Rebalance once a year and ignore market forecasts. Neither you nor anyone else knows where stocks and bonds are headed over the next year or 10. Just one thing is certain. If you're devoted to a portfolio of index funds (and you don't mess around), you'll beat 90 percent of professional investors after fees on an equal risk‐adjusted basis. That means the balanced portfolios I listed, for example, will beat most professional investors who choose 60 percent stocks and 40 percent bonds. The aggressive portfolios I listed will beat about 90 percent of professional investors who choose 90 percent stocks and 10 percent bonds.

That said, be honest with yourself. If you're the kind of person who obsesses about past and future returns, don't build your own portfolio. Your fear and greed will likely lead to speculation. It will sabotage your profits. Read Chapter 8 again. Select a financial advisor who will build you a portfolio of low‐cost index funds. You'll make a lot more money if someone can harness your emotions.