International Diversification for Country with a small economy

[Hal]

Update: Looks like currency hedged international bond funds are not all that bad. See attached link
https://institutional.vanguard.com/iam/ ... omain=true


I was after some feedback in assisting an Australian friend setting up a PP in their superannuation fund (like a 401K)

So the two options we are considering:

No1:

25% Gold held outside the superannuation fund
25% ASX300 Index Fund
50% Australian UBS Composite Bond Index Fund (Duration approx 6 yrs) Only local bond option

No2:

25% Gold as previous
12.5% ASX300 Index Fund
12.5% Global Share Index Fund hedged to Aud (only international equity option -MSCI All Country World Ex Aus)
25% Australian Composite Bond Fund
25% Global Composite Bond Fund hedged to Aud (only international bond option - Barclays Capital Global Aggregate Bond Index) Approx 6 years duration

As the Australian stock fund is heavily biased toward banking at 48.1% and the Aus Bond Market is small, we are interested in diversifying. Remember, you have more people in Texas than we have in the whole country!!

Any and all thoughts welcome,
Hal

[Pfanni]

MSCI World ETF, US 30yr bonds.

I'm from Germany, in kind of a similar situation - the economy is too small to be truly diversified.

My advice in general would be, do not engage in too many different assets.
Rebalancing becomes harder and harder, even just four assets like in the traditional Permanent Portfolio produce fees upon rebalancing.

[Hal]

Thank you for your thoughts Pfanni.

I think the approach to take will be:

1. If he has investments (denominated in Aud) outside the retirement plan, then just go for Global Bonds, Global Shares inside the retirement plan (plus buy some gold)

2. If there are very little funds outside the plan, then go with a retirement plan with a 50/50 split of local/international shares and bonds. (Essentially an international PP and a local PP).

This exercise has turned into a quite useful study on currency hedging.

Regards,
Hal