What’s the Rand at today?
Being South Africans, the Rand’s performance relative to other major currencies is often a topic for conversation and expletives. The media loves to report on Rand weakness and how “all-time lows” are on the horizon. It seems that every radio station, including the very niche, all seem to think that we want to know how the Rand is faring relative to the US Dollar – at least five times a day; as if it had some immediate and relevant consequence for our day. That and the price of an ounce of gold.
Never understood that.
Supply and demand
The Rand relative to all currencies trades like a share does, though what drives the price of a US Dollar in Rands terms differs to what would drive the price of a share in Pick n Pay, but the fundamentals are the same. Supply and demand – more people wanting to sell than buy will put downward pressure on the price and vice versa.
Like shares in a company, nobody knows which way a currency will go in the short term. There are fundamental differences between the South African economy and the US economy that would lead one to expect the Rand to generally depreciate relative to the USD over the longer term, however in the short and medium term – nobody can say with certainty which way it will go.
When’s the best time to buy?
We want to share something with you that will hopefully make your investing life a LOT simpler. It’s an incredibly useful approach to tackling many personal financial dilemmas. In this article though, it’s all about when is a good time to take money offshore?
The short answer is that ‘every time’ is a good time to take money offshore. Diversification in terms of assets classes is crucial to manage risk, however diversifying your long-term investments across geographies and currencies, is also desirable.
If you’ve decided that your investment portfolio requires some offshore assets, you may be tempted to consider the Rand/USD exchange rate and ask yourself:
“Is now is the best time to be taking money offshore? “
Perhaps R14.00 to the USD is not the best time?
Your proud stash of R50,000 that you had designated towards some retirement investing, is suddenly only worth USD3,500. Maybe if you wait until next year the Rand will be back near more ‘rational’ levels at R11.00?
What if it gets worse though?
You’re asking yourself questions that nobody knows the answer to, so don’t even bother trying. Don’t create unnecessary stress for yourself and don’t let anybody else tell you that they know either.
The simplest way to tackle these challenging questions is to resign yourself to never knowing and adopting an approach called ‘Rand cost averaging’.
Rand cost averaging – the “one weird trick” to painless investing
Rand cost averaging is the process whereby foreign currency is regularly bought/invested in, regardless of what the Rand is trading at. Practically implemented, this might see you investing R1,500 in foreign assets every month via a debit order and never paying attention to what the Rand is doing.
This process will see you acquiring USD at twelve different exchange rates over the course of the year, each rate unlikely being equal to any others. Your average exchange rate at which you bought USD will be lower than the highest, and higher than the lowest. You have chosen to not pretend to know which way the Rand will go and to simply spread out your currency buying over time.
In fairness, you may have prophesized that the Rand was going to depreciate radically next year, so getting USD 3,500 now, was worth it. This may in turn come true, in which case you can pat yourself on the back for a good guess.
The alternative is also as likely. The Rand may strengthen back down R12.00 in which case had you waited; you could have bought USD 4,200.
The unfortunate reality is that nobody knows which way it will go.
Adopting a Rand cost averaging approach, will ensure a middle-of-the-road average exchange rate for you. Extended over the long-term, it becomes even more refined, smoothing out the spikes and the dips.
Remember: Slow and steady wins the race
To adopt Rand cost averaging is not to admit defeat. Rather, it’s a great way to answer the impossible question as to whether or not now is a good time to invest offshore based on what the exchange rate is doing.
If in the case of our hypothetical R50,000 investor above, you could ‘phase in’ your investment over the next 12 months, or maybe just 6. There would be a 50% chance that you’ll do better than had you bought all your USD today, then again there would be a 50% chance that you’d be worse off.
Remember that personal finance is not about the ‘best’ solution, rather, it’s about a having a workable plan at all.