Geographic Diversification - Q and A Thread

[craigr]

I'm curious about the scope of geographic diversification that people use.  Is the idea to have a couple thousand dollars in a savings account as "bug out" money?  Or something like 1/3 of all assets?

If the foreign accounts hold cash and gold, do you count those toward your domestic PP?  If so how do you handle currency exchange rates?  Or do you build a full four-asset PP in the foreign country?  Do foreign banks transact in all four assets?

Does it matter whether the country in question speaks your native language?  Has anyone researched English-speaking, former UK colonies aside from Canada: Australia, New Zealand, South Africa, Hong Kong, etc.?  What about the Phillipines?  Or Caribbean banking centers?

My personal view is that you keep the bulk of the gold allocation overseas. Since there are relatively few transactions on it required and no interest/dividends involved it is easiest and it provides the most safety.

I wouldn't trust any Carribean country or any third-world country with my money. I would like it to be in a place with a historically stable government and well established legal system for protecting private property. Hong Kong concerns me simply because of the relationship with China. Although frankly the Chinese are likely to leave Hong Kong alone because it is a major financial center that does nothing but help them. Australia and New Zealand are viable alternatives in some respects. Japan may be as well but I haven't looked at it closely. Same with Singapore. South Africa I think is on the way to becoming Zimbabwe and I would avoid it. Their government is corrupt and incompetent.

[craigr]

A corruption index may also be a good place to start if you wanted to put money into another country outside of Switzerland:

http://www.transparency.org/policy_rese ... 10/results

I would obviously avoid any country that scored low in various corruption metrics.

And it's also not a coincidence that I recommend avoiding even investing in any corrupt countries with your stock money. It's just not worth the risks.

[KevinW]

That's an interesting chart!  Switzerland, Canada, Australia, and New Zealand all score highly according to them.

The Scandinavian countries do as well; any thoughts on them?

Chile is the standout of South America.  Thoughts?

[craigr]

That's an interesting chart!  Switzerland, Canada, Australia, and New Zealand all score highly according to them.

The Scandinavian countries do as well; any thoughts on them?

Scandinavian countries are not corrupt of course (I firmly believe that a culture of honesty is required for a successful economy which is why the countries lowest with the corruption also have the best standard of living. IMO). But Scandinavian countries are not big on financial privacy when it comes to government requests. I'm not sure how they would react to extreme events in terms of freezing accounts, etc. Switzerland just has a long tradition of protecting these things that other places do not.

Chile is the standout of South America.  Thoughts?

Chile is on my list of places to visit next in South America. I have heard nothing but good things about them. They are known to not be tolerant of corrupt activity the way other Latin American countries are. But I don't know about banking possibilities there.

[KevinW]

On one hand, it seems like it might be beneficial to work with a country that's "off the radar," like Chile or New Zealand.

On the other, it might be beneficial to ride the coattails of the powerful interests that bank in Switzerland.

[smurff]

If you have kids in university, be sure they participate in a good Study Abroad program as part of their undergraduate education.  Or try to get them to go to grad school abroad.

(If you have the time, freedom, and money, you could enroll in an overseas program yourself.)

If you have any influence in the decision about what country to do the study abroad term or year, try to help the student select among countries high on the anti-corruption list and/or high on the financial privacy list.  (So, no study abroad in Afghanistan, Brazil, or Honduras.)  Try for one where you'd want to stash your money.

Then, when the family arrives in the country of choice to help get the student settled, you can open a current (checking) account, or several accounts, including a joint one with the student.  It will be totally non-suspicious, and the springboard for moving money and opening safe deposit boxes and other accounts.  The banker will be happy to see you every time a new term begins.  

And when the educational experience is over, you and your study abroad student get to keep the accounts, but you may have to change their form.  (For example, a current or savings account designed exclusively for students might be transformed into regular international current or savings accounts when the student is no longer in the country.)

I speak from experience (grad school).

[smurff]

Credit Suisse asked to hand over U.S. client data: 
http://www.reuters.com/article/2011/11/ ... IO20111108

and

Swiss offer U.S. tax deal for all Swiss banks:
http://www.reuters.com/article/2011/11/ ... RC20111103

[craigr]

Credit Suisse asked to hand over U.S. client data:  
http://www.reuters.com/article/2011/11/ ... IO20111108

and

Swiss offer U.S. tax deal for all Swiss banks:
http://www.reuters.com/article/2011/11/ ... RC20111103

The lesson here is that trying to avoid taxes with dodgy schemes is not a good idea no matter where you are putting your money.

Say, how much money did current Secretary of the Treasury Tim Geithner dodge and still get his position?

[murphy_p_t]

3) Physical gold and a financial product that stores the asset outside the country. This could be physical with a fund like CEF that stores assets in Canada. Or maybe an ETF like SGOL that stores it in Switzerland. Plus is you have some diversification against natural or manmade disasters in the US. Minus is a government emergency could still force repatriation of assets against your wishes.

If we have level 3 gold ETF held in domestic US account / IRA, any theories on how Uncle Sam will treat this during a future gold confiscation / bank holiday? My sense that level 3 does not offer any real protection from the gov't when its held in that domestic brokerage.

[craigr]

3) Physical gold and a financial product that stores the asset outside the country. This could be physical with a fund like CEF that stores assets in Canada. Or maybe an ETF like SGOL that stores it in Switzerland. Plus is you have some diversification against natural or manmade disasters in the US. Minus is a government emergency could still force repatriation of assets against your wishes.

If we have level 3 gold ETF held in domestic US account / IRA, any theories on how Uncle Sam will treat this during a future gold confiscation / bank holiday? My sense that level 3 does not offer any real protection from the gov't when its held in that domestic brokerage.

I suspect it won't help much. Probably more for natural disaster diversification. But that also assumes the records of owners are not severely disrupted. An ETF held at a broker is in a street name and that is what matches up to the shareholder. So if that were disrupted there is a problem.

Gold confiscation is down on the list for me compared to diversifying against broker failure, fraud, manmade or natural disasters, etc.

[moda0306]

If they're confiscating gold, it really helps if they know you have it.  I'd be much more nervous about assets that supply the IRS with a 1099 statement every year than using some physical gold in your home and safety deposit box that they never know anything about.

I'm not suggesting fraud outright or anything... just that if you try to think of a logical chain of events, in a world of wealth in the form of 1's and 0's, busting into peoples' homes and searching their safes is WAY down the list of "efficient ways to confiscate wealth."

It's much easier to have a high tax rate, strict reporting requirements by financial institutions, a printing press, and legal tender laws.

I know we talk about government being stupid, but when it comes to plucking the hen without us realizing it, they really know what they're doing.

I think one fair question to honestly ask yourself with all this is, "When does the government become so confiscatory or illegitimate that I disobey reporting or tax law."  I'm not saying we're even close to that point, but I think if we're honest with ourselves we won't be following laws into our own financial ruin.  At some point we'll say, "I'm not reporting this to the IRS."  At that point, it'd be good to have physical gold on hand, as any securities purcased via financial institutions have to be reported.

[moda0306]

To go further, in todays world, one could say that gold represents not just money, but "portable, easily hidden wealth," which doesn't apply to most things in this world.

If "confiscation," whether by taxes or other means, is the name of the game, gold at this point in this world is probably doing very well, as it's not as easily grabbed by gov't.

I think things like real property (land and its contents) and securitized wealth (stocks/bonds) bare the real risk in the future.  I chuckle (though I respect these men (and women) a lot) at the survivalists who hate government and think it's time to get off the grid, so they buy a bunch of land, which is almost fully dependent on the government's deeding process holding up, not to mention subject to property taxes, land-use laws, squatter regulations (I think), and, unlike your other wealth, is something they may think they can use better than you can... making you a target for land confiscation in the name of the "public good," paying you a "fair price" to move off.

If I was skeptical of government, I wouldn't touch land with a 10-foot pole.

[smurff]

Land in the USA confiscated daily, under eminent domain laws.  It can be done by the federal, state, and various local governments.  The so-called market value paid by the government in an eminent domain confiscation may not be full compensation for all the values (especially the non financial ones, like the comfort of a multi-generational family home, neighborhood affection, beauty, genealogical or other historic significance, etc.) that a particular property may hold for the owners.

And if the land is confiscated under criminal forfeiture laws (drugs, taxes, terrorism, or whatever else the governments determine to be forfeiture-worthy crimes), or to repay huge fines (as fines imposed for the kind of hoarding indicative of mental illness) there won't be any compensation paid for it.  I don't foresee limits on the circumstances under which the government (fed, state, local) determine land and other property to be ill-gotten gain or otherwise worthy of forfeiture over something someone decided is a crime.

Buying land with the goal of self-protection from government confiscation of assets is a waste of time and money.  Who's to say that the government won't confiscate your property to sell it to Chinese (as just one of many overseas examples) investors who hold trillions of $ in USA bonds, because they could make "better" use of the land (and as a way to extinguish some of that bond debt)?

[moda0306]

smurff,

Hammer... meet head of nail...

Land is so easily justified to be added "to the public good" and forced out of your hands "at fair market value."  If anything, it's one of the highest-risk assets in a world of government confiscation and high taxation.

I know quite a few people, though, that see the land they bought as the cure to big government (keeps them away from metro/suburban areas, protects them from inflation, and gives them somewhere to exercise their individualism (shoot stuff)... it's almost the ultimate expression of their individualism next to their pickup truck and sportsman hobbies.

I own a home and I think it offers me some great opportunities to live life in a way I wouldn't otherwise be able to, but as I look at my property tax bill and local regulations, I would never view a plot of land as anything I'd want to own if I didn't have a lot of faith in my governments... local, state, and federal.

[MarySB]

Please excuse my ignorance, but I just looked up ZGLD on my app, and there are eight different ZGLD ETFs listed:

ZGLDUS.SW
ZGLDF.PK
ZGLDGB.SW
ZGLDHC.SW
ZGLDEU.SW
ZGLDHG.SW
ZGLD.SW
ZGLDHE.SW

I assume they are gold holdings in various countries (US, France, Great Britain, etc). So, @craiger, which one is the one you are recommending, or do you recommend more than one?

Thank you. 

[smurff]

I know quite a few people, though, that see the land they bought as the cure to big government (keeps them away from metro/suburban areas, protects them from inflation, and gives them somewhere to exercise their individualism (shoot stuff)... it's almost the ultimate expression of their individualism next to their pickup truck and sportsman hobbies.

Moda, these are all great reasons to own land.  Your friends can shoot empty cans and race pickup trucks to their hearts' content on their own land  (especially on land in the countryside).

BTW, I include metro/suburban/city plots as at-risk for confiscation, not just the big acreage in the countryside.  Heck, I'll even throw in condos, coops, stratas, and similar multiple-unit ownership dwellings into the takings mix.  "Real estate" might be a better term than "land."

But I agree with you--buying real estate to protect against government confiscation of assets?  Nah...

[craigr]

Please excuse my ignorance, but I just looked up ZGLD on my app, and there are eight different ZGLD ETFs listed:

ZGLDUS.SW
ZGLDF.PK
ZGLDGB.SW
ZGLDHC.SW
ZGLDEU.SW
ZGLDHG.SW
ZGLD.SW
ZGLDHE.SW

I assume they are gold holdings in various countries (US, France, Great Britain, etc). So, @craiger, which one is the one you are recommending, or do you recommend more than one?

Thank you. 

You may not be able to buy it in the US as a US resident. The old prospectus said it was not registered here but that may have changed. ZGLD is the ticker elsewhere. ZGLDUS.SW may be the symbol to use here, but I've never tried to buy any. You may want to write to Zurich bank (www.zkb.ch) and ask them what to use.

[FarmerD]

smurff,

Hammer... meet head of nail...

Land is so easily justified to be added "to the public good" and forced out of your hands "at fair market value."  If anything, it's one of the highest-risk assets in a world of government confiscation and high taxation.

I know quite a few people, though, that see the land they bought as the cure to big government (keeps them away from metro/suburban areas, protects them from inflation, and gives them somewhere to exercise their individualism (shoot stuff)... it's almost the ultimate expression of their individualism next to their pickup truck and sportsman hobbies.

I own a home and I think it offers me some great opportunities to live life in a way I wouldn't otherwise be able to, but as I look at my property tax bill and local regulations, I would never view a plot of land as anything I'd want to own if I didn't have a lot of faith in my governments... local, state, and federal.

My brother last year had 15 acres of some of his best farmland taken by the local municipality.  He was told the lawyer for the city would negotiate a fair deal with him.  So what happened:

Lawyer: "We'll give you $1,700 per acre for your land.  Negatiation closed."  She then turned, laughed at my brother and walked out.  Needless to say my brother had to hire his won attorney to defend his land.  After two years of legal fights, he ended up getting $4,500 per acre. 

Though he felt good about the outcome (minus his legal fees), he told me he felt bad about all the people who can't afford proper legal representation. 

[moda0306]

Do they give you the value of the land assuming they are or are not going to be able to do great things with it?  Imagine a plan like the following:

1) Large area of farm land outside metro area exists.

2) Most farmers sell their land to city & developers for urpan expansion.

3) City comes to YOU and says... "Eminent Domain!!! We want your land!"

4) Land is worth $2,000 per acre in its current state, but $4,000 per acre if the city can guarantee the proper infrastructure to support now-expanded economy in that region.

5) City offers you $2,000????

That's what I don't like about it.  The value of "the last chunk of land to go" in an area could be worth VASTLY more than it would be worth in a vacuum just because its the only thing holding up a prosperous new development.

[TripleB]

Here's my Geographic Diversification Question:

What is the efficient frontier of diversification on a cost-value x-y axis?

For example, you get huge diversification value by putting 1/100 of your gold bullion into 100 different underground bunkers, in 100 different countries. The cost to do that would be substantial, so this lies on the inefficient zone.

On the flip side if you put all your gold in one safe deposit box that's 3 blocks from your home, the cost is virtually nothing, but you get zero diversification benefit.

How do we find the efficient frontier of this goal? I imagine the frontier shifts based on:

1) Your total net worth
2) Your withdrawal timeline

If you plan to live off your assets and die in the next few years, then it would be foolish to store your gold in a safe in Europe because the costs to fly out there and extract your gold every year would be high.

If however you plan to work forever, or leave behind a huge sum of wealth to family, then it makes sense to store gold in Europe.

Also, if you have a huge net worth, then it's more efficient to do things overseas, whereas a low net worth would make it prohibitively expensive.

I believe most of the costs of performing diversification of any level are fixed costs, so the greater your net worth, the less "expense ratio" performing the maneuver will cost.

How do we find the efficient frontier? In my mind, any American with less than $500k is probably better off not diversifying, because we can really only send gold overseas, and I wouldn't want to send more than half of my gold overseas, and at a $500k PP, that's only about $60k of gold you can send overseas.

[CA PP]

MarySB,

ZKB has 7 gold funds: USD, EUR, CHF, GBP and EUR hedged, CHF hedged, GBP Hedged. 
The one of interest to you must be USD denominated: ZGLDUS SW.

[murphy_p_t]

I wouldn't want to send more than half of my gold overseas, and at a $500k PP, that's only about $60k of gold you can send overseas.

what is the basis of 50% overseas being max?

Part of the reason I ask is that gold seems to be the lowest cost way to get international diversification (thru likes of perch, goldmoney, global gold) for the average middle class American.

[murphy_p_t]

https://secure.sovereignman.com/lifeboat/

I'm curious if anyone has purchased any materials like that from this link (or similar) & what your comments are.

[TripleB]

I wouldn't want to send more than half of my gold overseas, and at a $500k PP, that's only about $60k of gold you can send overseas.

what is the basis of 50% overseas being max?

Part of the reason I ask is that gold seems to be the lowest cost way to get international diversification (thru likes of perch, goldmoney, global gold) for the average middle class American.

If I need to rebalance, I don't want to fly to Europe to have to do so. In theory, as long as 50% of my holdings of any single asset are easily liquid and accessible, then I should be able to rebalance the PP in 99.9% of situations because it's unlikely things will fall so bad relative to each other that I need to sell more than 50% of my "winning" asset to re-achieve 4x25%.

If you're referring to holding gold internationally in some type of ETF, or other type of custodian account, then sure, keep 100% in there. When I say "hold gold internationally," I mean physically opening a safe deposit box where you leave gold bullion that only you know about. And when you need to sell it or add more, you must personally go yourself.

If it's an account that has 1s and 0s reporting the total holdings, then you are losing diversification value, which is partially gained by secrecy. Someone can't seize what they can't see.

[BearBones]

Back to your original question, Craig. I recently sold a second home in Canada, so I have maintained a Canadian bank account for years. Although I no longer need it, I like having some of my cash in a foreign country for all of the reasons that you indicated earlier in this thread, especially in a country with low corruption, a very stable banking industry, and a high natural resources to population ratio. For anyone interested in Canadian banking, see "The Big Five" Canadian banks at this link:  http://en.wikipedia.org/wiki/List_of_ba ... _in_Canada

In addition to a checking/savings account and GICs (equivalent to our CDs), one could open a safe deposit box and keep some bullion in Canada for additional geographic diversification. I think that it would be best to have an account at the bank, so that the SDB fee would be deducted automatically, and so it would be less likely for the box to be deemed abandoned if you did not come in to the bank for a while. Preferably, any accounts at the bank should have less than 10,000 U.S. dollars so that you do not have to file a FBAR form. This would add a small layer of protection from U.S. confiscation. Yes, it could be discovered, but there would be a lot easier and larger fish to fry if the U.S. were to confiscate gold or other valuables.

As for adding bullion to a Canadian bank account? This could be purchased at a dealer in Canada, or it could be brought across the border. In theory on could bring up to 10k across the border, with each Eagle or Maple worth $50. Maples may be best if there is any chance of trading in Canada, since I believe that there is a Goods and Sales Tax on anything less than 24k (e.g., Eagles). Maples are also "legal tender" in Canada at the face amount.

I am primarily posting this for feedback and in the event that it might be helpful for Craig and MT's book. I hope that i have this mostly right. Any additional thoughts? In responding, lets not debate the merit of geographic diversification in general, please?