Gyroscopic Investing

Hi dear all,

ah you Americans, I envy you. As to investing you are the lucky ones. Got the world's biggest financial markets, the longest investment tradition and people who are willing to take risks. For Germans things are quite different. Born in a country of savers, insurance buyers and risk avoiders it isn't as easy as in the U.S. to compose a nice HBPP.

Well, German bonds aren't the problem. Okay, interest rates are well below those in America, but the LT-Bonds react as they are supposed to do: When inflation rates sink, deflation seems to be looming around the corner or the economy is sluggish bonds perform fine. This year German Longs are up over 20 %. 

For the cash portion you must be kind of masochist as even the nominal interest rates for short term German bonds are negative! I divided the cash portion between those bonds and bank accounts. 

Now let's talk about the interesting stuff. I wondered if Gold which is priced in US-Dollar would do its job to prevent an European portfolio from a currency devaluation or inflation in Europe. It does as this year showed: While gold in Dollar hasn't barely moved in ten months it ist up 11 % in Euro - thanks to Mario Draghi bashing the Euro down.  What a central bank!

The thing that causes me some headache is the stock portion. If I would concentrate solely on my home country I would only own 80 stocks using Dax-ETF and MDA-ETF (Midcap).That's why I also bought an index fund on the Stoxx600 which gives me exposure to other EU-countries as well as to Great Britain and Switzerland.

Now I'm thinking about investing a quarter of my stock portion in an index fund for the MSCI World which is invested in the U.S. with 55%. I'm not sure whether that would make sense and I hope that you can give me some advice or thoughtful insights. The pros IMHO are: I get exposure to the world strongest economy and companies that lead change all over of the world. I would profit if the Dollar ist strong. Nonetheless I'm still invested in my home region with 75 % of the stock money. The cons: If the U.S. stock market lags the EU (beware but there have been such odd times) then the performance of the stock portion will suffer. Furthermore I could lose money or not make as much as I would have if the Dollar softens.

What do you think? Is a partial exposure to the U.S. for an European investor sensible or does it more damage than it would help? Would it make sense to buy an MSCI World-index fund that hedges currency risk?

Thank you very much for reading until here. I thought it would be good to talk about my background to avoid misunderstanding. I believe too that we have quite a number of European fellows following this forum who could be interested in this question. Appreciate every comment. Great work here going on.

How about having a clean Euro-based PP but also buying US stocks as part of your variable portfolio? In other words, use 25% of your PP for an Euro-zone stock index fund and, separately, buy as much US stocks in your variable portfolio as you have risk appetite for.

Hi Jake, thanks for your advice which would be fine if I'd have a VP. The point is: I don't wanna have a VP which may sound strange. But I have been trading and speculating so long that I have enough from screening charts, filtering buy candidates, shorting wheat etc. If I had a VP I couldn't help but staring at charts again to know whether I should get in or out of U.S. stocks - I know myself. A VP would therefore diminish the benefits of having a PP which, for me, is peace of mind and the knowledge that we are on the safe side. So in my case we come back to the question: Should Europeans have an exposure to U.S. Stocks with their PP? What do other non-U.S. based investors think?

We live in a global economy; so I think you have to invest Global, despite the currency risk.
So I have 30 % EU stock, 30 % US stock, 30 %  Asia, Pacific, Latin Amer. & 10 % national stocks. Or just take VT / VTI

happyspec,

Welcome to the forum. Wish I could give you a non-EU perspective, but, alas I live in the US. I think in your position though, I would be less concerned with tweaking the stock portion than I would be with the fact that gold is priced in US Dollars. I was able to find this chart online for the price of gold in Euros:

http://www.infomine.com/investment/meta ... /gold/all/

(The default setting is in US Dollars but you can change it to Euros)

So, obviously there was a big move up throughout the 2000s that didn't quite match what we had here in the US but, as you pointed out in your first post, the exchange rates can also work in your favor at times.

The alteration you are talking about making to your stock portion is only 6.25% of your total PP whereas the gold portion would be 25%. Best not to have too much of your total return linked to the USD/Euro exchange rate, IMO.

Incidentally, just glancing at what the DAX has done in the last several of years, it would seem to give you similar returns to the S&P though I haven't studied it closely.

This probably doesn't get you any closer, but... I too am very interested to hear what others have to say & wish you luck.

Me again. The main role of gold in the PP is to really perform when there is serious inflation or when people perceive that the USD is shaky. Let's consider a recent Chinese PP... the Chinese have essentially pegged the Renminbi to the dollar so gold's performance in China has been strongly negative over the last couple of years at a time when food, housing & other costs are skyrocketing. In other words, when there is real domestic inflation going on in China, and gold should be soaring, it is flat in Renminbi terms.

When Germany was experiencing runaway inflation in the early 1920s, the US was actually moving from a highly inflationary period to a fairly dramatic deflationary one. Admittedly, gold wasn't free to float back then and it DID provide a store of value for Germans, but it wasn't going up sharply to counteract the devaluation of the Deutsch Mark.

Can't you just move to the US?

I'm curious what others have to say on this. To me gold is the biggest potential issue with the European PP, not stocks. But I do see your point about wanting to invest in an area where there is real prosperity (at least one in which corporations are profitable and share prices are rising).

Happened to read this today...
http://europeanpermanentportfolio.blogs ... anent.html

Thomas Hoog wrote: We live in a global economy; so I think you have to invest Global, despite the currency risk.
So I have 30 % EU stock, 30 % US stock, 30 %  Asia, Pacific, Latin Amer. & 10 % national stocks. Or just take VT / VTI

I agree with you that we live in a globalized economy. But I doubt that we therefore should invest in the way you propose. If we follow the idea behind your decision it would be consequent to globalize with our other asset classes too, i.e. bonds and cash, because globalization can't just have an effect on only one asset class and on the others not. IMHO this contradicts the basic idea of the HBPP. For me the idea is to be protected against the risks of inflation, deflation, prosperity and recession in the home country or the region WE live in. Yes, everyone read correctly: risk of prosperity!  If we think of the four economic conditions Harry identified as risks then it is clear that you want to have stocks of your home country / region if the companies there happen to make a lot of money because people are in a spending spree. This is why I wouldn't like to have the bulk of my stock investments outside the European Union.

happyspec wrote: Hi Jake, thanks for your advice which would be fine if I'd have a VP. The point is: I don't wanna have a VP which may sound strange. But I have been trading and speculating so long that I have enough from screening charts, filtering buy candidates, shorting wheat etc. If I had a VP I couldn't help but staring at charts again to know whether I should get in or out of U.S. stocks - I know myself. A VP would therefore diminish the benefits of having a PP which, for me, is peace of mind and the knowledge that we are on the safe side. So in my case we come back to the question: Should Europeans have an exposure to U.S. Stocks with their PP? What do other non-U.S. based investors think?

I'm UK based and I sleep well at night with a UK PP and no exposure to US stocks. The key for me is that the PP hedges me against manipulation of the money supply in the economy that I am in. To the extent that the UK market tracks the US stock market (owing to the global influence of the US economy) then there is no point in me holding US stocks. To the extent that UK stocks are doing something different to US stocks (owing to specific economic conditions in the UK) then I want that to be reflected in my PP because I want my PP to reflect local conditions so that I can harvest volatility and maintain my hedge against my local government's manipulation of the economy I'm in. Therefore, there is no point in me holding US stocks either way I look at it. Hope that helps!

happyspec wrote:

Thomas Hoog wrote: We live in a global economy; so I think you have to invest Global, despite the currency risk.
So I have 30 % EU stock, 30 % US stock, 30 %  Asia, Pacific, Latin Amer. & 10 % national stocks. Or just take VT / VTI

I agree with you that we live in a globalized economy. But I doubt that we therefore should invest in the way you propose. If we follow the idea behind your decision it would be consequent to globalize with our other asset classes too, i.e. bonds and cash, because globalization can't just have an effect on only one asset class and on the others not. IMHO this contradicts the basic idea of the HBPP. For me the idea is to be protected against the risks of inflation, deflation, prosperity and recession in the home country or the region WE live in. Yes, everyone read correctly: risk of prosperity!  If we think of the four economic conditions Harry identified as risks then it is clear that you want to have stocks of your home country / region if the companies there happen to make a lot of money because people are in a spending spree. This is why I wouldn't like to have the bulk of my stock investments outside the European Union.

Oh, but I do.  I have Gold in EUR & $. I have LT Bonds 75 % EUR & 25 % US bonds. Only cash is European.

Jake wrote:

happyspec wrote: Hi Jake, thanks for your advice which would be fine if I'd have a VP. The point is: I don't wanna have a VP which may sound strange. But I have been trading and speculating so long that I have enough from screening charts, filtering buy candidates, shorting wheat etc. If I had a VP I couldn't help but staring at charts again to know whether I should get in or out of U.S. stocks - I know myself. A VP would therefore diminish the benefits of having a PP which, for me, is peace of mind and the knowledge that we are on the safe side. So in my case we come back to the question: Should Europeans have an exposure to U.S. Stocks with their PP? What do other non-U.S. based investors think?

I'm UK based and I sleep well at night with a UK PP and no exposure to US stocks. The key for me is that the PP hedges me against manipulation of the money supply in the economy that I am in. To the extent that the UK market tracks the US stock market (owing to the global influence of the US economy) then there is no point in me holding US stocks. To the extent that UK stocks are doing something different to US stocks (owing to specific economic conditions in the UK) then I want that to be reflected in my PP because I want my PP to reflect local conditions so that I can harvest volatility and maintain my hedge against my local government's manipulation of the economy I'm in. Therefore, there is no point in me holding US stocks either way I look at it. Hope that helps!

It does, thanks. Your reasons are convincing at least IMO. One could call this approach "Think globally but act locally By the way: I did some research about how such a European-/German-PP would have done since 2000 when rebalanced at the end of the year. Annualized yield was at 6.9%, the two worst years were 2002 (-3%) and 2008 (-2.4%). Think we could have done a lot worse with market timing, buy and hold stocks, managed futures and .. you name it.

Thomas Hoog wrote:

happyspec wrote:

Thomas Hoog wrote: We live in a global economy; so I think you have to invest Global, despite the currency risk.
So I have 30 % EU stock, 30 % US stock, 30 %  Asia, Pacific, Latin Amer. & 10 % national stocks. Or just take VT / VTI

I agree with you that we live in a globalized economy. But I doubt that we therefore should invest in the way you propose. If we follow the idea behind your decision it would be consequent to globalize with our other asset classes too, i.e. bonds and cash, because globalization can't just have an effect on only one asset class and on the others not. IMHO this contradicts the basic idea of the HBPP. For me the idea is to be protected against the risks of inflation, deflation, prosperity and recession in the home country or the region WE live in. Yes, everyone read correctly: risk of prosperity!  If we think of the four economic conditions Harry identified as risks then it is clear that you want to have stocks of your home country / region if the companies there happen to make a lot of money because people are in a spending spree. This is why I wouldn't like to have the bulk of my stock investments outside the European Union.

Oh, but I do.  I have Gold in EUR & $. I have LT Bonds 75 % EUR & 25 % US bonds. Only cash is European.

Hi Gerard, I thought about have US-Long Bonds too as the U.S. can always print its way out of the mess but Eurozone-countries cannot. But I refrained from doing that because if we have deflation in the EU it doesn't necessarily mean that the US will experience deflation too. In this case the money in US-Bonds won't act as a protection against deflation. That's why I decided to buy LT-German bonds only. I had too bite my teeth because yield was low but bonds are acting fine this year as yields are getting even lower.

I cashed out a lot of euros @ 135.50 on the advice of Martin Armstrong. That was a nice trade so far. I have started buying US/CAD mining stocks now with the proceeds as I can smell the bottom in the next few months. Much prefer the US market but will buy anything anywhere if I think it is cheap and also buying here there and everywhere is a nice way to balance stuff out.

I have a lot of interest in the Eurozone being a partner in a business that is in 4 countries and does business in Euros. Unfortunately due to the nature of the ECB and  no collective debt mechanism I think the Euro is doomed to fail, but as I have enough exposure in my day job I think it is OK for me to have some hedge in USD...and it is more fun

Honestly I would like to investigate more about EU companies but I find them as boring as bonds which I do not own either. Ha, not a very good PP guy am I

jabba wrote: I cashed out a lot of euros @ 135.50 on the advice of Martin Armstrong. That was a nice trade so far. I have started buying US/CAD mining stocks now with the proceeds as I can smell the bottom in the next few months. Much prefer the US market but will buy anything anywhere if I think it is cheap and also buying here there and everywhere is a nice way to balance stuff out.

How is good ol' Martin Armstrong these days?  I haven't heard a peep from him in a year or two since he seems clueless about RSS feed or e-mail/IM notifications, etc..

http://armstrongeconomics.com/armstrong_economics_blog/ he posts regularly on his blog, like lots. his calls in the last couple of years have been nothing short of amazing.

jabba wrote: http://armstrongeconomics.com/armstrong_economics_blog/ he posts regularly on his blog, like lots. his calls in the last couple of years have been nothing short of amazing.

It's still not public but I figured it out: http://armstrongeconomics.com/armstrong ... s_blog/rss

I've been following him since the late 90's before he was wrongly imprisoned.  The guy is one in a billion.

MachineGhost wrote: The guy is one in a billion.

So there are seven of him?

Are you one of the seven?

happyspec wrote:What do you think?

Just build a US PP.  It will give you stability and protection no matter what comes. 

Unfortunately, his RSS feed still doesn't work so I don't get to keep up.  I think his time in prison made him clueless about the Internetz.

I am a Euro investor and am converting some existing holdings to a PP. At present I hold the following Euro stock ETFs, all traded in Paris, in the following percentages of the stock component of the portfolio:

CEU: MSCI Europe 24%
SP5: S&P 500 12%
TPXH: Japan hedged in Euros 26%
UST: Nasdaq 26%
LEM: Emerging Markets 12%

Obviously 24% Europe is not ideal for a Euro investor, and in any case I  would like to simplify the portfolio to reduce the inclination to tinker.

I know there is no universal answer to this question but I would value some opinions or a guideline: what proportions of the different ETFs would be best, or at least better? I am inclined to go for 50% MSCI Europe, 50% S&P 500. The 50% figure is a trade-off between staying in my own currency and exploiting the relative stability of the S&P 500, and is fairly simple.

Or should I leave in a small percentage of Emerging and Japan to make a sort of world index (like Thomas Hoog above)? Or just go 100% Europe? What do you think?

Out of the 25% of stocks, I am thinking about investing 20% in EU stocks and 5% in the S&P500. I don't trust the eurozone 100% and that is why I am thinking of tilting a bit to US stocks.

Another thing that is harder for us european is to find data for some of the ETFs or even the underlying indexes that they follow. Some times the data is not available, other times the number of years is too low.

tarentola wrote: Or should I leave in a small percentage of Emerging and Japan to make a sort of world index (like Thomas Hoog above)? Or just go 100% Europe? What do you think?

Why don't you adopt the equity exposure from global market portfolio?

[img width=800]http://i60.tinypic.com/30ldis9.png[/img]

Thanks MG. I considered VT but its composition is not unlike what I have at the moment. From Vanguard's site, VT composition is (my figures in parentheses):
  9.40% Emerging Markets (12%)
  22.10% Europe (24%)
  14.20% Pacific (26%)
  0.20% Middle East (0%)
  54.10% North America (38%)

So again not enough Euro representation in VT for me. But you have given me an idea - I could invest in something like 50% Euro, 25% USA, 25% Asia Pacific. If I sold half my Nasdaq and half my Japan and bought Europe with the proceeds, that would just about do it.

Tarentola,

how are you?

If you are using EUROS everyday you should hold a 100% EU-PP.

That's what theory says, no?

frugal wrote: If you are using EUROS everyday you should hold a 100% EU-PP.

That's what theory says, no?

Well, let's think about this logically.  If you are using your Permanent Portfolio money every day, if that is the money you're using every day, then it would make sense to take that into big-time consideration.  If not, then.... why should you?

If my Permanent Portfolio is just going to sit there for decades, why would it matter what currency it's in?  It can be in Martian Bowlhawkles, as long as I can easily convert it into usable money whenever I need it, what do I care?  If it is giving a good return, that's the bottom line.

Where I could run into problems is if my currency that I'm going to spend has some wild fluctuations vs. the Bowlhawkle.  And the currency market can be very volatile.  But, long-term, things will all even out and rough purchasing power parity will be maintained between my currency and the Bowlhawkle.  So long-term, no problem.

Shorter-term, there will be increased volatility.  So, I am trading off increased volatility in exchange for... what?  For, in my humble opinion, a portfolio that is more all-weather, more bullet-proof.  If the Euro crashes, people will likely flee into the dollar.  If the dollar crashes, people will likely flee into gold.  So, gold is a super winner if there's inflation in the dollar.  It will go up even more than the dollar falls.  It's almost like it's leveraged.  Gold can still serve as a hedge against inflation in other smaller currencies like the Euro, but will not be as effective in carrying the entire portfolio.

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.