Permanent Portfolio strategies for a UK citizen in Taiwan

[kev_in_tw]

Hi,

I'm a UK citizen running a business in Taiwan. Unfortunately even several years later I'm still dependent on cash from the UK side of the business.

In the UK I've got some property which I rent out. I've also set up a relatively small permanent portfolio, like this


NameSymbolGain %
ETFS METAL SECURITIES LD ETFS PHYSICAL GOLD £PHGP17.75%
ISHARES II PLC ISHARES FTSE UK ALL STKS GILTIGLT11.87%
DB X-TRACKERS DB X-TRACKERS £ MONEY MKT ETF CAPXGBP1.77%
DB X-TRACKERS DB X-TRACKERS FTSE ALL-SHARE ETFXASX2.66%


I've had this since 19/10/2010. It's +8.52% up since then. Annualised the return is about 4.78%

I.e. it's not too bad. One mistake I made was using the XGBP fund which is basically money markets - I'd have got a better return in a building society.

Now since I'm based in Taiwan I worry that my assets are too UK based. The UK is a relatively small economy and there are clearly issues with the banks there. Also the shares I've got are with HSBC in the UK. They are also held in a nominee account. The first £85000 in shares owned via HSBC are covered by deposit insurance. Of course in a meltdown the deposit insurance may not pay out. And anything above that is not covered. Normally worrying about HSBC going under would be paranoia, but right now I'm not sure the risks are negligible, even if they are rather small.

I've got an account with Fasttrade.co.uk where I have a CREST sponsored account. CREST sponsored accounts mean that the shares are not in a nominee account but you are the beneficial owner. So if the sponsor, e.g. Fastrade, goes under you could theoretically transfer the shares to a different broker and sell them. So if I want to expand the portfolio that is one option.

Still I worry about currency risks - aka the GBP crashing or more likely slowly devaluing versus the TWD. I've done some research into a Permanent Portfolio in Taiwan, but I've still got no idea how to do this in practice.

The other option would be do Permanent Portfolios in other currencies. This would diversify the risk. Still Harry Browne apparently thought that you should do your portfolio in your own currency. Then again I'm not really sure that the GBP is my currency - I've got no plan to go back to the UK. In fact if the balloon goes up financially speaking I'd rather head pretty much anywhere else than the UK. The reason I've got assets there is that my English is a hell of lot better than my Chinese so I feel like I've got a better idea of the risks.

There's an argument for USD because the US is a remarkably resilient place over the long term, and a PP is relatively easy to implement there - e.g. SPY, TLT, GLD, SHY as mentioned here.

http://etfprophet.com/the-permanent-portfolio/

The strategy was developed before the time of ETFs. While using ETFs shifts the risks involved, their prevalence and accessibility make it easy to implement the Permanent Portfolio. The above baseline performance history was compiled using an ETF based strategy, simply holding 25% in each; SPY, TLT, GLD, SHY.

In fact you can hold US ETFS in a UK CREST account - there's something called a CDI. Of course I could just fly to the US and set up the portfolio the old fashioned way if I didn't trust the CDI mechanism to cope in the middle of an implosion of the UK economy.

I've also wondered about Australia, Switzerland, etc. That way I'm still somewhat diversified and insulated from a GBP crash.

I think the basic problem is that Harry Browne was a purely American investor because he had no intention of moving elsewhere. That was fine for him, but a lot of people now have much more complex lives - i.e. we work in multiple countries over our careers and intend to end up in the long run in perhaps another one. Perhaps you could argue that diversifying across currencies is a more Harry Browne approach to the problem of currency risk than trying to predict the future.

[Storm]

If you're planning on living in multiple countries throughout your life, perhaps a US based PP is the best option as you can always retire in a low cost of living US state with little risk.  Just something to think about.

Also, speaking from personal experience, it is very easy for both UK and Taiwan citizens to gain access to the US because they are two of the most favored nations.  My wife is Taiwanese and they even let her 80+ year old father emigrate to the US and gain citizenship because of his military service in Taiwan.  I think there is something to that "the enemy of my enemy is my friend" argument (China, perhaps )...

[dualstow]

I think the basic problem is that Harry Browne was a purely American investor because he had no intention of moving elsewhere.

Wikipedia states that Browne

lived in Vancouver, Canada and Zurich, Switzerland in the late 1970s and early 1980s

but yeah, maybe he knew he was going to return to the States for the remainder of his life.

I hope things go well for you in Taiwan. I lived there for two years and loved it.

[kev_in_tw]

If you're planning on living in multiple countries throughout your life, perhaps a US based PP is the best option as you can always retire in a low cost of living US state with little risk.  Just something to think about.

Also, speaking from personal experience, it is very easy for both UK and Taiwan citizens to gain access to the US because they are two of the most favored nations.  My wife is Taiwanese and they even let her 80+ year old father emigrate to the US and gain citizenship because of his military service in Taiwan.  I think there is something to that "the enemy of my enemy is my friend" argument (China, perhaps )...

I've got a certain amount of confidence in the US - it seems to be very resilient over the long term. In fact if you look at the 1930's the US, UK, Sweden and Switzerland were the only places you'd really want to be as the rest of the world went down the tubes.

And it's interesting that service in the ROC armed forces is seen as a plus by the US even now.

[kev_in_tw]

Wikipedia states that Browne

lived in Vancouver, Canada and Zurich, Switzerland in the late 1970s and early 1980s

but yeah, maybe he knew he was going to return to the States for the remainder of his life.

Well I think that's the difference - I'm not planning to go back to the UK. Either I'll stay in Taiwan or move on somewhere else.

Actually it's interesting he picked Canada and Switzerland. Those are both places that are to some extent outside the reach of the US Government when it comes to money.

It's hard to put into words the sort of situation where being wholly UK based is bad. I guess it could be something like

1) The UK economy/currency crashes a la Iceland wiping out pretty much all investments and making it hard to get to the remaining ones. Even if you can, the currency has dropped so much as to make them worthless.

2) There is a 1930's style economic/political meltdown which leads to governments seizing savings, extremist parties coming to power etc.

3) China invades Taiwan and various bad things happen economically and politically.

I think in both those cases you need to be diversified across countries. I'm still not sure how best to do that.

[dualstow]

I guess it could be something like

3) China invades Taiwan and various bad things happen economically and politically.

I guess it's beyond the scope of this thread, but are people still talking about China invading Taiwan? The day I left the U.S. for Taiwan was the day after China conducted a military exercise by shooting missiles near the island. My friend, a fellow English teacher, chickened out. I went there alone, was praised for the U.S. aircraft carrier (as if I had anything to do with it) and forgot that the mainland existed for the next 2+ years. This was in the late 90s.

[kev_in_tw]

I guess it could be something like

3) China invades Taiwan and various bad things happen economically and politically.

I guess it's beyond the scope of this thread, but are people still talking about China invading Taiwan? The day I left the U.S. for Taiwan was the day after China conducted a military exercise by shooting missiles near the island. My friend, a fellow English teacher, chickened out. I went there alone, was praised for the U.S. aircraft carrier (as if I had anything to do with it) and forgot that the mainland existed for the next 2+ years. This was in the late 90s.

I don't think it's very likely. But in the long run unlikely things can happen. If you look at the rest of the post I'm worrying about even less likely things like Europe ending up like it did in Orwell's 1984 or the GBP being permanently destroyed as a currency.

Now the odds of all of those are slim to none. However I don't think you can write them off, especially if you look at what is happening in Euroland.

Incidentally I was wondering about currencies.

Look at this graph



Let's suppose I set up 4 permanent portfolios in currencies I feel are safe havens, CHF (Swiss Franc), AUD (Aussie Dollars), USD (US Dollars) and CAD (Canadian dollars). In the end it turns out I need GBP after all. Now if you look at the graph the USD seems to be correlated pretty strongly to the GBP, so not much happens there. However all the other currencies appreciate.

Now suppose I decide that I want to end up in Taiwan.



Curiously enough the effect is the same - I'd be better off holding this group of foreign currencies than TWD, even if I'm going to end up spending mostly TWD.

Now at this point you'll point out that this is hindsight - there would be no way to predict this batch of foreign currencies would perform well.

However that makes me wonder if you could add another layer to the Permanent Portfolio itself.

The PP says - invest in this group of assets because they are well balanced. It doesn't protect you against the risk of your own currency tanking. I've seen people talk about Iceland PPs. And actually in the midst of the apocalypse an Iceland PP held up pretty well. On the other hand if you had an Iceland PP you'd end up holding Iceland Kronor, a currency that had just dropped through the floor. Now people have also commented that an Icelander would have been well advised to do their PP in Euros. But that again is a question of hindsight. It is by no means clear the EUR, GBP or even the mighty USD won't at some point suffer the same fate.

And the cleverest part of the PP is that it is based on the fact that the future is unpredictable. I.e. we don't try to work out if Gold is a bubble or stocks are undervalued. We buy together with stocks and bonds because we know that back in the 1980's when the Gold price crashed or back in the when stocks grew at insane rates such a mix would do OK.

Suppose we add another level to the PP like this. Instead of owning one 'home' currency we own a basket of four currencies. In each currency we have a PP. I.e. in randomly picked set of a currencies I would have

A Swiss PP

A Austrialian PP

A USD PP

A Canadian PP

Each one has the traditional 25% Gold :25% Long Bonds :25% Short Bonds :25% cash split.

Of course that raises a lot of questions. How do you pick the four currencies? It seems like for a PP like effect to work you should pick some currencies that have done well and some that have done badly. Or can you just pick a bunch of currencies that look uncorrelated or 'safe' and get some sort of benefit?

Should you rebalance between currencies? I.e. if AUD has gone up and USD has gone down, do you rebalance from AUD to USD? Unfortunately I've got no idea how to back test something as complex as this - it seems like you'd have to get all the data to simulate a PP in each currency and then find some way to rebalance - perhaps using Gold or USD as a reference point.

Now maybe for a lot of people here this is all a bit abstract. However the USD has devalued against a lot of currencies. Even if you never leave the US, your costs would increase if it really crashed. Over the 20 or so years that you'd keep the portfolio the odds of the USD losing its reserve status are not that low I'd suspect. Harry Browne originally advised holding some Swiss assets in case the US economy crashed.

There's a certain charm to the idea that you could theoretically make your way to Switzerland and have an intact PP containing a quarter of your assets even if very bad things happen. You could buy some goats and a farm, marry a nice Swiss girl and learn to yodel.

[dualstow]

You could buy some goats and a farm, marry a nice Swiss girl and learn to yodel.

I think that's somewhere in the addendum to 'Fail-safe Investing.'    ; - )

[hoost]

However that makes me wonder if you could add another layer to the Permanent Portfolio itself.

The PP says - invest in this group of assets because they are well balanced. It doesn't protect you against the risk of your own currency tanking. I've seen people talk about Iceland PPs. And actually in the midst of the apocalypse an Iceland PP held up pretty well. On the other hand if you had an Iceland PP you'd end up holding Iceland Kronor, a currency that had just dropped through the floor. Now people have also commented that an Icelander would have been well advised to do their PP in Euros. But that again is a question of hindsight. It is by no means clear the EUR, GBP or even the mighty USD won't at some point suffer the same fate.

I think what you're missing here is that the PP isn't just a randomly selected group of assets that happened to backtest well.  The asset classes chosen for the PP were chosen because one of them tends to perform well in each of the four possible economic environments.  The assets were chosen based on logical reasoning and an understanding of the assets' behavior and the different economic environments.

Backtesting doesn't prove that they will work, it simply doesn't prove that they won't work.

Gold is a currency, even if it's not an official currency of any country right now.  If any one currency begins to decline, the price of gold in that currency will typically increase.  The reason HB advised holding physical gold is to hedge against a currency collapse.

The problem with holding currencies other than gold as a hedge against the devaluation of your own currency is that other currencies are subject to the same manipulations as your own.  This means that if the country whose currency you hold as a hedge is devaluing more rapidly than your country is, you will lose purchasing power.  The only currency that isn't subject to these manipulations is gold, which is why it is held in the PP.  It's held in physical form, preferably outside your home country, in case of a catastrophic collapse.

If I were you, and I was worried about one of these two countries collapsing, I would consider keeping some of your physical gold in the UK to hedge potential issues in Taiwan, and some in Taiwan to hedge potential issues in the UK.

I hope that helps.

[gizmo_rat]

Also the shares I've got are with HSBC in the UK. They are also held in a nominee account. The first £85000 in shares owned via HSBC are covered by deposit insurance.

FWIW For shares the FSCS only cover the first £50,000 per person per platform. Cash deposits are covered to £85,000.
http://www.fscs.org.uk/what-we-cover/el ... on-limits/

[kev_in_tw]

Also the shares I've got are with HSBC in the UK. They are also held in a nominee account. The first £85000 in shares owned via HSBC are covered by deposit insurance.

FWIW For shares the FSCS only cover the first £50,000 per person per platform. Cash deposits are covered to £85,000.
http://www.fscs.org.uk/what-we-cover/el ... on-limits/

Really? Bloody HSBC told me it was £85K. I shall raise this with them next time I'm back in the UK.