PP REBALANCING

[Clive]

?

[cowboyhat]

I could see holding all foreign stocks if you are based in a country with a small economy and not much domestic stock market to chose from, but that is not the case for a US-based investor. Many of the best stocks are denominated in dollars.

For a US-based PP investor what about diversifying some of the stock holding and also holding a basket of foreign currencies for part of the cash allocation? In making this shift you would be trading the safety of short term US Treasuries against dollar currency risk. There is involved in either holding. You have to decide how much of each risk you prefer to include in your PP.

A separate question I have is about the utility of the 15% rebalancing band. Historically it has not added to PP return. Selling winners seems much more important than buying losers. So if long bonds are getting crushed the way gold was in the 1990's, what is the rush to buy them?

[clacy]

I believe there is a significant foreign equity presence built in to SPY or VTI due to the multi-national nature of the US's largest companies.

With that said, I often hold much more foreign and emerging equities in the portion of my money that is not held in the PP (about 2/3's)

[doodle]

I have been thinking for awhile about the best way to set up a true international PP. The equity and gold are easy. The bond and cash not so much.

With regards to the cash there seem to be a number of ways to go about gaining exposure to intl currencies:

CurrencyShares or Wisdom Tree ETFs - High expense ratio and trading fees a problem.

Forex Account - Never done it...does anyone have experience? Is interest paid on cash balances?

Everbank - This bank is a mystery to me and I wonder truly how transparent / solid their operation is....again does anyone have experience with them?

[moda0306]

I'm wonder if, for a worldwide PP Bond, one should use countries that are sovereign, with no default risk.  It would seem that maybe a combination of Japanese & U.S. bonds could make up a decent portion of it.

[doodle]

The primary benefit of an international PP to me is that it seems to limit the black swan type events that can occur within one country. I recently saw a chart indicating that the US bond market only constitutes around 25 percent of the total world bond market....down from a much higher percentage a few decades earlier. A similar reduction is taking place with regards to the equity market as well. There is no doubt that our days as a global hegemon are waning and with that the dollars status as the worlds reserve currency. It won't happen overnight but I don't think America will continue to dominate the globe the way it has done for the last 50 years. The fact is that we are "broke" and sooner or later we will have to deal with this reality.

As the United States takes a more proportional position on the world stage, I think American investors could benefit from some international diversification. At a minimum it would reduce the possibility of being hurt by a catastrophic economic event. When "empires" collapse it can often be messy.

It would be great if we could put our heads together on this board and come up with a PP for the 21st century....one in which the US dollar might no longer be the worlds reserve currency.

The TLT, SHY, SPY, and GLD formula can be implemented by a third grader and is a very effective way of putting HB's portfolio into practice.


I would love to see a similar portfolio devised on an international platform.

[KevinW]

IMO the standard 4x25 PP is already adequately hedged against severe domestic problems, mainly by the 25% gold allocation.

[doodle]

If there were severe domestic problems in the US, an Intl. PP would outperform a purely domestic PP. If there were not severe domestic problems, then you could reasonably say that some years the US PP will outperform and some years it will underperform. So the International PP would provide on average, a similar return over the long haul as a domestic PP.

The reason I adopt the PP approach is because preservation of capital is more important to me than growth of capital. This being the case, I think spreading your assets around the globe could improve capital safety and safety from extreme unforeseen events.

It used to be that when the US markets shuddered the rest of the world soon followed. As the US becomes a smaller player on the world stage, this correlation between US and world markets won't always be so strong. When Argentina defaulted on it debt the worlds markets barely reacted. Yet, Argentina used to be one of the wealthiest countries in the world less than a century before this. An Argentinian with international assets during this economic disaster would have done much better than a purely domestically exposed investor. I think it would behoove us to at least devise a plan on how to implement such an Intl. PP. In a similar regard a Japanese PP investor would have benefitted from international stock exposure as the Nikkei collapsed as has as of yet still not rebounded anywhere near previous highs.

We have data from Japan, GB and the US over the last 40 years. Does anyone have the ability to put these all together and figure out how a PP split between these three economies would have performed from the standpoint of a US investor? Would it have significantly underperformed? Would the Std. Deviation have increased?

[doodle]

Thank you Clive. Your ability to run these comparisons is a true contribution to this site. I have a little trouble deciphering that chart you posted however. What I was trying to find out is the performance of the portfolio below from the standpoint of a person living in the US, Japan, and GB. In other words the same Intl PP would be used no matter what country you lived in. How would this combination look from the standpoint of a person in the US, JPN, and GB when accounting for exchange rates? Thanks a million for what you do!

Stocks: 8.33 US / 8.33 JPN / 8.33 GB
Bonds: 8.33 US / 8.33 JPN / 8.33 GB
Cash: 8.33 US / 8.33 JPN / 8.33 GB
Gold: 25%

[AdamA]

IMO the standard 4x25 PP is already adequately hedged against severe domestic problems, mainly by the 25% gold allocation.

I agree.  When I start think about the multitude of things that can go wrong within an economies financial system, it always makes me feel better to know that I own some gold.

[KevinW]

If there were severe domestic problems in the US, an Intl. PP would outperform a purely domestic PP.

Why?  Is there evidence of this?

[Pkg Man]

IMHO the best solution here is not to tinker with the PP but rather hold some foreign investments -- stocks, bonds, and currency -- in a VP.