In general it is always good to diversify. Buy funds in €uros, in Japanese Yen, Swiss Francs, Norwegian Krones. Weigh them sensibly, for instance by GDP (more €uro than Yen, more Yen than Francs, more Francs than Krones… )
I for one have sold 95% of my holdings in U$ Dollar. Since then I like watching the Dollar slide. This will not last forever, I guess, but I think the worst of the slide and of the consequences of trump’s tariffs is still to come.
There must be a way to invest abroad without paying a fortune in exchage fees. European banks have a spread when buying and selling that depends on many factors and can range from 0.01% or less for blue stocks and 50% or more for puts and calls. The exchange rate is not mentioned in my fees, I think it is irrelevant.
I’m in a rather similar position: cash-heavy.
I don’t have any good ideas. Bond funds seem in general to pay only about 1 to 1.5% over current MM rates in dividends, which is not enough of a premium to justify the risk IMHO.
If fed rates are reduced in future, this will become more pressing, of course, as MM rates slide.
As a UK citizen and resident, I should perhaps do some more research into UK &/or European assets. But Trump notwithstanding, it still seems that the US equities market still essentially dominates the financial world…?
By volume, yes. But the yield seems to be getting worse. Five months is not enough time to be sure this a trend, but my gut feeling is yes, it is. Done on purpose by the current US administration (and I use this term loosely). Why they would do this is beyond me.
I think they will, for the foreseeable future. But I think we are headed for a rough patch.
One of two things are reasonably likely, IMO:
- Trump’s idiotic ideas end up working out OK for the US, and thus US equities remain the way to go
- Trump sends everything sideways, at which point there’s enough anger and outrage inside the US that we go back to pre-Trump normal, we look like idiots, and things revert to where they were pre-Trump.
The US economy is just so damn large it’s hard to imagine it being displaced.
My bet is on 2, but I won’t say 1 has a non-zero chance. And FTR, when I say “working out OK for the US” I just mean we keep strong economic growth, low unemployment, and US companies continue solid earnings growth. I don’t mean “yay Trump policies”
Having spent most of my working life in the US, I don’t currently have a UK brokerage account; all of our family assets are in US institutions. My wife is a US citizen and we own houses in both the US and the UK: we are a fairly transatlantic family.
But we seem to be spending most of our time in the UK these days… I should probably look into setting up some UK investment vehicle(s)…
I’m personally adverse to frequently rejiggering my allocations.
You made a significant reallocation decision to cash heavy based on tariffs trade so on.
If I understand correctly you are as concerned about that now as you were when you made that reallocation decision, if not more.
But FOMO? Are you being disciplined with your plan and your volatility comfort level or chasing returns?
Generally a decision to go cash heavy is made because the money may be needed in the near to moderate term, or in anticipation of a sector or broad downturn and wanting to have cash to buy when down.
Right: trying to time or finesse the markets is usually counterproductive.
In our case we are retired and so have less options for recovering from losses, hence an ongoing policy of moving assets into less risky instruments.
On the other hand one doesn’t want to just stuff money under the mattress… inflation etc…
One would like the less risky instruments to be doing at least some work for you!
There don’t seem to be any good alternatives to MM accounts at the moment, though?
Having never lived in the USA I don’t have a US brokerage account, but I can buy shares and funds in New York in Dollar, in Geneva in Swiss Francs, in Tokio in Yen via my European bank. They have counterparts in all relevant markets. Having US funds, S&P500 ETFs and individual US shares was great as long as those rose in general and the Dollar appeciated against the €uro. This trend seems to have reversed (as I said: five months is not a long time for a trend). It is true that, as you wrote, “that the US equities market still essentially dominates the financial world”, but for small investors like us there is still more than enough non US stocks, bonds, funds, derivates and whatever you want in the RotW. We all still need the USA markets on aggregate, but nobody needs them individually. I am out, don’t know when I’ll be back.
Unfortunately I currently don’t see any investments that are safe and can beat inflation either.
I’ve stayed true to the changes upthread. And I’m quite happy with the results. However (and I know this will sound obnoxious) we’re a childless, two good paying career couple, and cash has a tendency to accumulate, since we’re also both cheapskates.
good post. And there is nothing wrong with being in cash right now, That may change, but it’s paying fairly well at the moment.
So to my way of thinking … you have decided that a certain fraction will be in each class, modifying it recently. You likely have some rebalancing plan. Some do it annually, some by some defined percentage variation from the plan. If the latter then significant cash accumulation may trigger a rebalance. (And I have nothing intelligent to add to the discussion of what sort of cash, different currencies, etc.)
We each will have our own conclusions for how much to in cash right now based on our individual circumstances and volatility tolerances. Being heavy into cash would be wrong for me. I have enough in cash to provide for some certain expense over the next year and have, as discussed earlier in this thread, modified my allocations slightly in other ways to be slightly more defensive and diversified. Point though is having made those changes I am now going to keep hands off for a while. I’m still prepared to have to wait out a major drop in the next year, reallocating if it happens, and in position to participate in upside if it doesn’t. IMHO nothing has happened to alter our decisions, whatever they were, over the past three months.
Well said.
FTR I’m retired not quite 2 years, so in the “living off the interest / dividend / growth” phase, not in @OldOlds’ accumulation phase. I have the good fortune that I can’t spend it as fast as I’m making it though, so in effect I’m still in his “What to do with excess income?” phase. I know; first world problem that.
IMO having just had my monthly CFA chat yesterday …
Right now the difference in yields between “cash” = MM and medium term bonds is not that large. It’s easy to get bent out of shape about 4.5% vs 4.9% or whatever, but if you actually math out what that difference delivers in return for the the amount of money you might reallocate between them, well, it might buy dinner, but it won’t buy a month’s worth of dinners.
It also scales with your wealth. If the yield difference for your amount of money is $100 a month, well, stop and think how important a marginal $100 is. Probably not very. If you’re wealthy enough that the difference instead comes to $10K, well it’s still not enough to move your much larger needle. Perspective is easy to lose when just looking at interest rates, not the actual cash flow that a given interest rate delta will drive.
With things as turbulent as they are, I’m / we’re taking the view that holding more cash in MM rather than in T-bonds is smarter. I view the small yield I’m giving up as essentially an insurance premium against being badly wrong-footed by teh krazy and ending up with a lot of capital trapped in 2-, 3-, or 5- year bonds yielding shit that I can’t sell except at haircut prices.
So as my 5-year bond ladder I built up shortly before retiring is running down, I’m not renewing it onwards; instead accumulating the unspent proceeds mostly in MM.
I’ve also taken a hefty position in FAHCX - Marketwatch. It’s sort of a halfway house with different alpha and beta than equities, T-bills, or MM. The total return is a good mix of cash and growth, and thus far it’s handled the trumply ructions with aplomb; neither crashing nor booming in response to the Xit of the hour.
I’ve been thinking about the various non-US / non-USD asset classes. But don’t yet have any useful opinions on that sub-topic. Nor do I own any of that category of asset. But I am watching attentively.
One of my personal acknowledged shortcomings here is that my advisor is totally US-centric. I don’t have to be limited to his advice, but after I get beyond his expertise, well … once the climbers get in front of the lead sherpa all sorts of unhappy silliness can occur. And has in years past. Ouch!
Sure, but this isn’t really a change in that. I took a position in a European index fund, VGK. I can buy the same index in Euros and traded on the Dax, and I’m wondering if that makes more sense if the dollar is going to continue to weaken.
I’m quite pleased with allocation I have now. I’m just wondering if it isn’t smarter to buy my Euro holdings in actual Europe. And maybe VGK’s share price will inherently reflect forex changes, but that’s the thing I can’t figure out. I’m worried I’ll be on the wrong side of arbitrage.
Please enlighten me / us on how one would buy the Euro-denominated version on the DAX. I’m not making any assertion here, just curious about the mechanics of getting an account where to do what.
If you are worried about being on the wrong side of arbitrage, have you considered spltting your VGK-equivalent (IOW FTSE 100) buy into two tranches, one US/USD-based and one EU/Euro-based? Each acts as a hedge against the other for concerns like currency fluxes, arbitrage, etc. If you went 50/50 between them you’d give up half the potential upside of all those unknown concerns, but also insulate against half the downside. You could vary away from 50/50 as you learn more about how the two investments behave relative to one another.
I just had that thought but I’m now warming to it myself. Once I know how to buy the EU/Euro version.
As with my comment in my prior post, you seem to be eager to make perfect play and are going onto limbs to obtain that. I remember being in that frame of mind a bunch of years ago. Shortly before I got my ass handed to me by the markets. I don’t claim any particular wisdom, but I’ve tried hard to stop chasing the last incremental bite of yield/return.
I use Fidelity. You simply execute a trade to convert dollars to Euros, then you can execute a trade on a number of foreign exchanges. You do need to have foreign trading turned on, which as I recall required me to read a thing about the extra risk of forex and of other markets possibly not having the same regulations as the US market.
At one time I held a position in a company in Australia, which is when I figured out how to do it.
As for chasing the perfect trade, maybe. But I really enjoy this stuff, and I like thinking about it. Some of it is the game of getting it right. If I’m being honest, my boring index strategy has done me extremely well, and I’m not the least bit worried about financing my retirement. But damn, this is fun.
Do I understand all of you right? Are you saying that while the rest of the world trades regularly in US shares, US investors usually only buy US shares, but no foreign assets at all? I mean, when my bank in Germany publishes last month’s most traded shares among its customers it is completely normal that the most traded share is an American one (here a snapshot of this month’s most traded shares on onvista, an online broker: No. 1 Rheinmetall (D), 2. NVidia (US), 3. Tesla (US), 4. RENK Group (D), 5. Siemens Energy (D), 6 BYD (China)). But while the RotW investors trade shares in the USA and the RotW, you usually only trade US shares?
Does Warren Buffet, for instance, also only buy American shares?
It has long been considered good advice to diversify internationally, but in the last 20 years or so the US equities markets have done so much better than virtually everywhere else that many people, including me, have focused there. Maybe 8 or 9 years ago I got tired of getting 1/2 the return in my “International Index Fund” compared to the S&P 500. We’re now seeing a renewed interest in international diversification.
In addition, in order to trade on European exchanges, we need to convert to Euros. One of the things that brings is Forex risk. Probably not a big deal with Euros, but very much a big deal with, say, Vietnam. There are many US-based funds that act as middle-man, making the investments in foreign assets. Like the mentioned VGK. I give Vanguard dollars, and they buy the foreign assets. The fund trades on a US exchange but is holding foreign assets.
Also, as I mentioned, it is not a problem to trade in foreign currency on foreign exchanges- I could buy Siemens on the DAX in 5 minutes if I wanted. But it is seen as something for a more sophisticated investor.
If US investors skew heavily towards US shares and the RotW invests in the US it is no wonder that the US indexess have performed better that the DAX, Nikkei, CAC-40 or FTSE. But the second part of this assumtion is perhaps no longer valid.
Concerning foreign exchange risk, that is, the risk due to fluctuations in the exchange rates of the currencies shares are denominated in, I suppose (did I get that right?): when currencies fall, the shares denominated in that currency tend to rise in lockstep. Turkey’s economy has performed badly, with high inflation and a sliding exchange rate for the Lira compared to the US$ and the €, but the stock market in Ankara has risen more than enough to compensate this. Same was true of Argentina the last years and to a lesser degree of Weimar Germany.
If your problem are the exchange fees charged by the bank or the broker you are being ripped off. Those fees should be small, almost negligible.
International diversification means diversifying the currencies too. That is evident for a non-US investor for whom the US$ is not the base currency: you should be invested in US$, but not only in US$*. The US$ has performed very well compared to € and Yen etc in the last ten years or so, but there have been other cycles. And the cycle is perhaps changing again. Just because you live in the US$ universe it does not mean that you are immune to the consequences of devaluation of your own currency.
*and there are moments, like now, when many people say f*#&k you! and completely drop the US$. May be exagerated, but I understand it.
Yes. If I have assets denominated in Thai Bhat, and it collapses, the value of my holding collapses with it. That’s FOREX risk. I’m not aware of an axiom that says the share price of said assets will necessarily rise to cover it- if that were the case, you wouldn’t see Forex listed as a risk. I suspect it’s going to be down to the individual asset. If I have a Thai commodity stock then I suppose the price would rise, but I wouldn’t assume that’s always the case for all asset types.
Growth in the US has outpaced the rest of the rich world for decades. The US also has a more permissive regulatory environment, which makes innovation and growth easier, particularly in tech.
In addition, as the US has moved more and more towards tax-advantaged self funded retirement plans, the amount of payroll money flowing into US markets each payday has helped drive up share prices.
Of course. This is why we’re having this conversation. Up until the current occupant of the WH, the risk to the US dollar was inconsequential. So while it might make sense to hold Ex-US assets, having them denominated in dollars (ie, VGK) wasn’t a risk in its own right. Is that changing now? Maybe.
Very true. It’s been a hopeful mantra for many years that some day emerging markets will take off like a rocket and eclipse the US indexes.
Hasn’t happened yet, so the idea that they are a useful diversification seems doubtful.
In fact, the whole question of diversification seems problematic: there really don’t seem to be any asset classes that are not strongly correlated with the US indexes.