European PP: Investing in U.S. stocks too?

[frugal]

Hello,

and if in 20 years when I need the money:

1USD = 0,5 EUR

[barrett]

Hello,

and if in 20 years when I need the money:

1USD = 0,5 EUR

That's the way I look at it too. A Swiss person starting a USD PP in 1970 or a Japanese person starting as USD PP in 1980 would both be WAY down due to long-term currency trends.

[LC475]

Hello,

and if in 20 years when I need the money:

1USD = 0,5 EUR

Doesn't matter.  Scratch that: it's great for tax purposes!  You've "lost" tons of money!  Other than that: doesn't matter.  All that matters is real.  Purchasing power, that is.  If 1 USD = 0.5 EUR then that means either the dollar has experienced a lot of inflation, or the euro a lot of deflation, or a combination of both (but to a lesser degree).  If there's been high dollar inflation, gold has kicked in and done well for you.  If there's been lots of Euro deflation, well, you've missed out on the boon that you would have had from just holding Euro cash; a quite unexpected boon, by the way, that would be quite unprecedented in modern times -- in other words, fat chance.  But that doesn't actually hurt you, it's just a missed opportunity.  Oh, if only we'd all invested in Berkshire Hathaway 40 years ago!  So maybe you'll feel psychologically bad for having missed out, but your real return from the Permanent Portfolio will be just the same as if the Euro hadn't somehow become twice as valuable.  It will be just the same as if you happened to be living in Japan or Tuva (or move there for retirement) and are now withdrawing in Yen or Tuvaloos.  Purchasing power parity makes it all work out in the end.

[LC475]

That's the way I look at it too. A Swiss person starting a USD PP in 1970 or a Japanese person starting as USD PP in 1980 would both be WAY down due to long-term currency trends.

I do not think that's actually true.

[barrett]

Thus, if you need things to be smooth and steady in smaller time increments, that is, if you're going to need your money soon, say, in less than five years, it would probably make sense to go with a localized PP-ish portfolio, especially if you guesstimate the chances of your currency experiencing high inflation in that time period are very low.

If, on the other hand, your time horizon is longer, fifteen years or more, I think you can count on the currency fluctuations, wild as they can be, all averaging out by then and so your returns will be the good predictable ones we've all come to expect from the PP.  In that case, I personally think creating a US-based PP would be a better option.  Others will differ with me; that's just my personal opinion.

I don't think it always does average out which is why I gave the examples of the Yen and the Swiss Franc.

That's the way I look at it too. A Swiss person starting a USD PP in 1970 or a Japanese person starting as USD PP in 1980 would both be WAY down due to long-term currency trends.

I do not think that's actually true.

LC475, Would you then be comfortable setting up a Yen, Euro or Renminbi-denominated PP? Or, put another way, isn't a long-term belief in the stability of the USD at least part of your reasoning?

[LC475]

If you will look at the charts and do the calculations, I think you will see that your belief that the standard US PP is WAY down in terms of purchasing power in Switzerland of Japan (since 1970 or 1980, respectively) is actually not true.

It is not even close to being true.

I think that's an important point to make.

Roughly, I think the actual figures are over 1000% and over 500%, respectively.  I could be wrong.

[barrett]

If you will look at the charts and do the calculations, I think you will see that your belief that the standard US PP is WAY down in terms of purchasing power in Switzerland of Japan (since 1970 or 1980, respectively) is actually not true.

It is not even close to being true.

I think that's an important point to make.

Roughly, I think the actual figures are over 1000% and over 500%, respectively.  I could be wrong.

One of us is thinking backwards, and while I'd normally put my money on myself in that scenario, I don't think it is the case here.

Just pulling rough figures from my head, the exchange rate on Swiss Francs was about 4 to every one USD in 1970. Now it is about 1:1 so as a Swiss person invested in USD, you would be down about 75% just due to currency risk, correct? Their money has gotten way stronger relative to ours.

[LC475]

Just pulling rough figures from my head, the exchange rate on Swiss Francs was about 4 to every one USD in 1970. Now it is about 1:1 so as a Swiss person invested in USD, you would be down about 75% just due to currency risk, correct?

Correct.  Over 4000% return, divided by 4, equals over 1000% return.

[LC475]

LC475, Would you then be comfortable setting up a Yen, Euro or Renminbi-denominated PP? Or, put another way, isn't a long-term belief in the stability of the USD at least part of your reasoning?

To answer your question: I am comfortable using currencies other than the dollar.  So, if there were a sound theoretical reason to set up a portfolio denominated in a different currency, I would have no qualms about doing it.  I simply do not think that such a reason exists at this particular time. 

The dollar is the reserve currency of the world.  The Permanent Portfolio takes advantage of this very special and privileged position the dollar holds in the market.  If the dollar stops being the reserve currency, hopefully the PP will give us time to notice and react and then gold will carry us through that transition period and then we can set up a different portfolio, depending on what comes out the other side.

So no, to answer your second question: I do not base anything on a belief in the long-term stability of the US dollar.  I do not even have such a belief.