Portfolio Net Worth & Dividends

[Mecisteus]

My answer to your question is similar to your answer to this question:
Is there currency risk in investing in Aussie dollar?

,,,assuming your answer will include something like "only the revaluation of AUD or SGD poses risk and rewards. The appreciation/depreciation of USD against SGD or AUD will have no net effect on AUD/SGD rate".

Good now we agree there is a currency risk investing in gold. we are not here to quantify this risk. so whichever correct directions are not important.

now comes to Aussie dollars. again im a straight forward person. im concern with the directions of AUD and SGD only. as for you i think you are contradicting yourself here. if i understand you correctly, i remember you mentioned like Aussie dollars can be denominated in USD, GBP, JPY, etc. so obviously if there is a huge demand for Aussie dollars from USD, AUD will move up. thus USD can have a net effect on the rate of AUDSGD. is it not?

 

[Epps_Sg]

Good now we agree there is a currency risk investing in gold. we are not here to quantify this risk. so whichever correct directions are not important.

now comes to Aussie dollars. again im a straight forward person. im concern with the directions of AUD and SGD only. as for you i think you are contradicting yourself here. if i understand you correctly, i remember you mentioned like Aussie dollars can be denominated in USD, GBP, JPY, etc. so obviously if there is a huge demand for Aussie dollars from USD, AUD will move up. thus USD can have a net effect on the rate of AUDSGD. is it not?

"If there is a huge demand for Aussie dollars from USD, AUD will move up."

You are talking about changes in demand of AUD asset itself, not foreign currency risk. USD depreciation may not always increase demand for AUD.
To me, currency risk basically means currency value changes having a "100%, direct, mathematical effect" on SGD returns. Thanks for feedback, one thing I now agree is that both local and foreign currency risks are still currency risks.

I will summarize below I see 3 kinds of risks to investment: demand risk, local currency risk, foreign currency risk, and all three are present for US stocks. For currencies and commodity, only demand risk and local currency risk are present, foreign currency risk is absent, which is why i differenciate between local or foreign currency changes when I see USD/SGD from 1.25 becomes 1.125.

To me, foreign currency risk is a direct mathematical certainty that if USD value reduces 10%, e.g. USD/SGD changes from 1.25 to 1.125, US stock value always reduces 10% in SGD mathematically and directly.

I made some comparisons of currency risks here. For Singaporean investing with SGD,

1. Risk on Foreign Asset Investment,
-e.g. US stocks.-
a. decrease in stock value (demand risk)
b. increase in SGD value (local currency risk)
c. decrease in USD value (foreign currency risk) e.g. 10% decrease in USD value causes USD to depreciate 10% against SGD only. Hence decrease in USD value by 10% poses direct and mathematical net loss of 10% of US stock in SGD.


2. Risk on Currencies, Commodities Investment
-e.g.Aussie dollar, Gold/Corn/Sugar-
a. decrease in stock/AUD/Gold value (demand risk)
b. increase in SGD value (local currency risk)
c. decrease in USD value (no foreign currency risk) e.g. 10% decrease in USD value causes USD to depreciate 10% against both AUD or Gold asset, as well as 10% against SGD, in the same proportion. Hence decrease in USD value itself poses no direct and mathematical net loss on AUD and Gold.

3. Risk on Local Asset Investment
-e.g. Singapore stock
a. decrease in Singapore stock value (demand risk)
b. decrease in SGD value -> decrease in bying power (local currency risk)
c. decrease in USD value has no effect on SG stock investment (no foreign currency risk)e.g. 10% decrease in USD value causes USD to depreciate 10% against both Singapore stock, as well as 10% against SGD, in the same proportion. Hence decrease in USD value itself poses no direct and mathematical net loss on Singapore stock.

 

[Mecisteus]

"If there is a huge demand for Aussie dollars from USD, AUD will move up."

lol you better dont create so many theories ok. this is the first time i hear got demand risk and separate local and foreign FX risk. the general risks are market, interest rate, FX, credit risks, etc.

http://en.wikipedia.org/wiki/Foreign_exchange_risk

by the way you are partially correct up there, if there is a huge demand for Aussie dollars from USD, AUD will move up and USD will move down.

why? because you need to SELL USD and BUY AUD. thus AUD will move up and USD will move down.

 

[Darkzi0n]

what is direct mathematical certainty and mathematical net loss? sounds like some very chim theorem.. but seems to be jus describing simple math.

 

[doody_]

To me, foreign currency risk is a direct mathematical certainty that if USD value reduces 10%, e.g. USD/SGD changes from 1.25 to 1.125, US stock value always reduces 10% in SGD mathematically and directly.

That doesn't need to be true for currency risk to hold.

Here is an example:
For a strange reason, John loves to drink Coke from the US. He swears that it's different from the Coke available here in Singapore. So, every month he will buy 1 bottle from the US.

Over in the US, they sell 1 bottle of Coke for USD1. So every month, John exchanges his SGD for USD to buy that bottle of Coke.

In Jan, let's say the exchange rate was SGD1.5 to USD1. So John paid SGD1.5 for his Coke.

In Feb, the exchange rate changed, and now it's SGD1 to USD1. So John only needs to pay SGD1 for his Coke.

In Mar, the exchange rate changed again, and now it's SGD2 to USD1. Now John has to pay SGD2 for his Coke.

In this simple example, there is currency risk due to the fluctuating SGD/USD exchange rate. In all 3 months, the Coke was still being sold at USD1 in US. However, John had to pay different amounts of money for it, because he primarily holds SGD, and has to exchange it to USD when he wants to make the purchase.

We could go on to talk about hedging against currency risk, such as by buying 2 bottles of Coke in Feb, or exchanging extra SGD to USD in Feb to take advantage of the low rate, etc... but I think that's getting too far from the discussion.

 

[Epps_Sg]

what is direct mathematical certainty and mathematical net loss? sounds like some very chim theorem.. but seems to be jus describing simple math.

Minus all the chim words i used, this is what I mean:
"if USD value reduces 10% against SGD, e.g. USD/SGD changes from 1.25 to 1.125, US stock value always reduces 10% in SGD"
Yes this is simple maths.

lol you better dont create so many theories ok. this is the first time i hear got demand risk and separate local and foreign FX risk. the general risks are market, interest rate, FX, credit risks, etc.

Foreign exchange risk - Wikipedia, the free encyclopedia

by the way you are partially correct up there, if there is a huge demand for Aussie dollars from USD, AUD will move up and USD will move down.

why? because you need to SELL USD and BUY AUD. thus AUD will move up and USD will move down.

That quote was actually from you, so i take it that you equate demand of Aussie dollar from USD causing AUD to rise as part of currency risk from USD for AUD/SGD investment..... not say you cant do that, but i think your definition of currency risk is very broad, and hard to calculate. My definition of currency risk is limited to changes in USD/SGD only, just I go further to define whether USD or SGD is the one that is changing more in value.
The wiki link definition of currency risk seems more complicated than what you and I are talking about in layman terms.... the wiki's definition seems more suitable for an economics test... One thing I noticed, your definition of currency risk is broader and more general than mine.

I think I was speaking out of frequency again. Just because you cant understand what my view points are does not mean I am making things up, it just means probably I shoudn't be saying those things to you. I am analysing the issue in more details, but I noted you had implied that you dont care about the details of how currecy risk works, you just care about the results of currency risk. I guess many people feel this way, just look at USD/SGD will do.
Seems we have slight divergence in how we define currency risk exactly. I can use your broader definition, but that means I cant go into details how your views and mine differs.

I am running out ways of explaining what I mean about gold's currency neutrality in your broad terms and frequency. Ultimately, since you don't really care about details of how currency works and don't need to analyse deeper how the market is functioning, I think you are quite right that 'you' just need to view the USD/SGD exchange rate, since according to my current understanding, your currency risk theory will still be correct 2 out of 3 times. For me, its just one of my principle to know the assets that I invest and trade in very well.

Ultimately, i benefitted greatly from this discussions so far to clarify to myself why gold is currency neutral, and I can better see how the gold market functions now - this is important to me more for Gold trading. Thanks a lot to Mike and the rest for your discussions on this topic. I guess my initial intention is to see how many people heard about gold's currency neutrality before, and also Gold investment should not be hedged to USD, else Gold loses its effectiveness as inflation hedge. I also want to add that hedging investment in Gold/USD and Gold/SGD against USD is as pointless as hedging Aussie dollar (AUD/SGD) investment against USD.
Cheers.

 

[Mecisteus]

thanks Epps for the long discussion. just keep it simple.

 

[friedpiggy]

I read with interest on the permanent portfolio, i have 1 question: what is the 25% cash part?

 

[Some-one]

I read with interest on the permanent portfolio, i have 1 question: what is the 25% cash part?

leave it as cash in banks.

 

[Epps_Sg]

I read with interest on the permanent portfolio, i have 1 question: what is the 25% cash part?

Hi. 25% cash is usually money deposited into: money market funds, 1 year or 2year govt bonds hold till maturity, fixed deposits, or savings acount, in that order of preference. This cash portion is suppossed to be liquid and stable, so cash is usually earning low returns.

Purpose of 25% cash is:
1. Provide usable money in tight money/credit recession - for example in 2008 when there was credit crunch and recession, it was more difficult to get loans, so having cash portion can help tide over sudden big expenses, without needing to sell losing stocks or well performing bonds for the cash.
2. Provide stability to portfolio in recession. In first 3 quarter of 2008, stocks and gold were doing badly, and bond was not performing that fantistically (yet), and only the 25% cash was stable which buffered portfolio loss. The stable 25% cash, together with bonds, contribute to entire portfolio suffering only -15% maximum loss. In contrast pure equity portfolio could have suffered up to -49% maximum loss. Then in 4th quarter 2008, the long bond was able to jumped up in Nov and Dec 2008 to almost overcome the -15% loss, making total portfolio loss in 2008 to be only -3.9% before dividends.On the other hand, the STI index ended 2008 with -49% loss.
3. Provide 'ammo' to buy cheap stocks at bottom of bear markets. In early 2009, an investor would been able to use some or most of the 25% cash to rebalance or sweep up vastly undervalued stocks at the bottom of bear market.
4. Part of 25% cash can be used as personal emergency funds, so it is not necessary for a PP investor to own another separate emergency fund.

So cash is a necessary part of the portfolio design from the investing perspective as well as day-to-day living perspective. I am happy to keep 25% as cash in the portfolio, as personally i value the practicalityand peace of mind of having liquid cash for day-to-day living, so I do not wish to risk liquid cash in risk instrument such as stock, gold, bonds that can decrease in value when I may need the cash most.

Right now, I leave all my cash in my savings account for the liquidity, as i can't be bothered to move it elsewhere because returns are all so low. In better times with higher interest, I will probaby park the cash in a money market fund.

 

[friedpiggy]

25% is alot... anyway if used to sweep up cheap stocks wouldnt that be messing up the allocation?

Btw, this is a pretty good read.

http://www.advisorperspectives.com/newsletters11/pdfs/What_Investors_Should_Fear_in_the_Permanent_Portfolio.pdf


looking at the direction interest rates would head long term, the article above does indicate something to be worried about.

I'll probably attempt this portfolio with CPF...

 

[gaara666]

Wow 25%. I am not that comfortable putting aside so much in cash – the opportunity cost of holding so much cash is just too high for me. I have <5% in cash and admit I run into minor cashflow issues especially with big purchase and I use credit card heavily (even for NTUC groceries) to defer direct pymt till the next paycheck comes in. I think this works well for me as it forces me to budget and not suffer from “wealth” affect (feel richer with cash and therefore spend/waste $$ on unnecessary stuffs)

 

[Pandule]

Guys. How about investing in SGX: S68. Any differences between this and sti etf?

 

[Mecisteus]

if your portfolio size is $10M, then 25% cash means $2.5M.

if your portfolio size is $10k, then 25% cash means $2.5k.

do see the imbalance in there? an emergency cash of $2.5M compares to $2.5k.

thats why i dont agree with the fixated 25% cash allocation. alot of opportunity loss with the cash for the 1st case. and i think not enough emergency cash for the 2nd case.

 

[Epps_Sg]

25% is alot... anyway if used to sweep up cheap stocks wouldnt that be messing up the allocation?

Btw, this is a pretty good read.

http://www.advisorperspectives.com/newsletters11/pdfs/What_Investors_Should_Fear_in_the_Permanent_Portfolio.pdf


looking at the direction interest rates would head long term, the article above does indicate something to be worried about.

I'll probably attempt this portfolio with CPF...

Well, if stocks and gold tanked during recessions, bond and cash will represent heavier part of portfolio. Sell the excess cash and bonds to buy into cheaper stock or gold so rebalance all asset back to 25% only - this is prt of the strategy. However, if one is a savvy investor with his pulse on the market...

Regarding the article, one or two assets of PP will be the laggard in any one time. One good question we should ask is, does this mean the strategy wont work if we always hold on to the laggard assets, or if we always hold on to the expensive assets and not sell them? Past 40 years of performance of PP positive track record says that the strategy still works, when done with mechanical rebalancing. IMO PP strategy works because if we hold on to both the lagging and expensive assets together, and because we are forced to rebalance and sell if any asset rose to become more than 35%, or buy if any asset become less than 15%. Market timing is what i do not want to do. Not to say the article can be right, IMO it doesnt matter to the portfolio even if the article is right, the negative impact will be minimal, compared to the disasterous effects if we market time wrongly. Eg. If one always listens to market predictors, they would haved missed the near 30% returns of long bond in 2008 and 2011, and missed out the gold profits in last few years. I just dont know when market trends will start or stop exactly. There are always market predictors - they work this way: they make lots of predictions, and when they are lucky to be right, people remember them, if predictions are wrong, they keep quiet and prople soon forget about their past wrong predictions. I just learn to tune market predictor out and follow the strategy consistently, since the strategy works and has already catered for this 'expensive'/'lagging' asset issue with rebalancing and choice of lowly correlated assets.

One thing on my mind is that a DIY CPF passive index portfolio, rebalanced yearly, probably has a very good chance of beating the CPF interest rates over the long term. IMO, permanent portfolio is more suited CPF passive portfolio because PP guards against more economic disasters that could be very bad for investment portfolio, such as high inflations, deflations, long period of low growth for stocks, severe recessions, all the while not needing to manage the portfolio much and has very high chance of giving returns higher than CPF rates.

 

[Epps_Sg]

Wow 25%. I am not that comfortable putting aside so much in cash – the opportunity cost of holding so much cash is just too high for me. I have <5% in cash and admit I run into minor cashflow issues especially with big purchase and I use credit card heavily (even for NTUC groceries) to defer direct pymt till the next paycheck comes in. I think this works well for me as it forces me to budget and not suffer from “wealth” affect (feel richer with cash and therefore spend/waste $$ on unnecessary stuffs)

I see your point about cash being easy to spend for some people. I think this can be one of the reason why Permanent Portfolio strategy says to hold 25% cash as 2 year govt bonds or in money market funds. In this case, the 25% cash becomes 'very low risk investment, so it wont be spent as easily as cash in savings account.

Just to contrast with your situation, I am the kind of person who is a saver (or hoarder.... lol) and i am very comfortable with saving (hoarding) large sums of money in bank and not touching it. I really have 25% of assets in 2 bank savings (to keep the figures small and less tempting), I dont run into cashflow issues with big purchase, I use credit card when i can to chalk up points and always pay the card bills at month end. I keep a record of my daily expenses with 90%~95% accurracy on my mobile app "Expense Manager". I admit I am very particular about spending less than what I earn every year, and about having savings which can be invested at year end. I am not that concerned about touching my existing cash savings as I know I am at least disciplined enough, and I am tracking income/expenses daily, not to spend more than I earn in a year.

 

[Epps_Sg]

Guys. How about investing in SGX: S68. Any differences between this and sti etf?

SGX: S68 is Singapore Exchange Limited - it is just one company. STI ETF contains 30 or so companies in Singapore - the companies are in different industry so the ETF is more diversified. In passive, one should use STI ETF that tracks a basket of companies, to reduce risk.

 

[Epps_Sg]

if your portfolio size is $10M, then 25% cash means $2.5M.

if your portfolio size is $10k, then 25% cash means $2.5k.

do see the imbalance in there? an emergency cash of $2.5M compares to $2.5k.

thats why i dont agree with the fixated 25% cash allocation. alot of opportunity loss with the cash for the 1st case. and i think not enough emergency cash for the 2nd case.

Initially when I first saw 25% allocation in cash, I also have these questions that you raised. I althought of the 'obvious' 'common sense' disadvantages you just highlighted. Instead of stopping there, I asked myself a better question: assuming if the portfolio really works, are there a lot of good reasons to be holding on to 25% cash, such that the good outweights the bad? Allow me to present a more complete perspective, IMO, on your conclusions.

Not 'all' of the cash are to be considered emergency funds. It is more correct to say 'part' of the 2.5M cash is emergency fund. Also, '2.5k' is typically not enough for emergency fund, so if one has such small portfolio, then cash portion has to be larger enough to form a reasonable portfolio.

What opportunities lost and gained with holding 25% cash?
Let's analyse both the pros and cons.

A) Having little cash on hand:
Pros:
1. More stock/bond/gold gives higher portfolio gains in growth cycle.
Cons:
1. The extra stock/bond/gold gives higher portfolio loss in recessions.
2. In recessions, little cash to buy very cheap stocks and lose a great opportunities to buy cheap.
3. Little cash for personal sudden big expenses, will have to sell off performing stock/bond/gold for the cash, hence affecting portfolio allocations - worse if have to sell losing assets during recessions.

B) Having 25% cash on hand:
Pros:
1. The extra cash reduces portfolio loss in recessions, preserving capital.
2. In recessions, gained an excellent, opportunity to buy very cheap stocks that canturn into great investments.
3. Having cash for personal sudden big expenses, without affecting portfolio allocations - less need to sell losing assets during recessions.
Cons:
1. Missed out on slightly more returns during growth cycles. If there is a 10 years bull cycle without recession, 25% cash will be quite useless, however this is ok because the profitable stocks would have more than offset the minimal growth in cash asset.

Obviously, benefits of (B) outweights the benefits of (A).

A common barrier faced by people new to Permanent Portfolio is to look at any asset in isolation and saying bad points of each asset and concluding the portfolio has some issues. The more correct way is to understand portfolio investing is to see why and how all the 3 volatile assets and cash work together to provide consistent overall returns and good shields against unforseen economic disasters - this requires thinking out of the box and outside one's comfort zone. If some people cannot think outside of comfort zone, they probably cannot understand Permanent Portfolio and PP will not be suitable for them. PP is may not be perfect, but it is far from being a poorly designed portfolio strategy for those who understands it.

A couple of quick thoughts, if I have 10M portfolio:
1. my big ticket items will not be 5k, 10k. My big ticket items will be more like 50K, 100K, so a 25% cash portfolio can cover that.

2. A 100k portfolio having 30% paper loss means losing 30k on paper - ouch.... A 10Mil portfolio losing 30% means losing 3Mil on paper - wow! that's like losing 3 condos.... The bigger the portfolio, I believe the less risk one wish to sustain, so 25% cash will look better, when portfolio size gets bigger.

 

[Epps_Sg]

Here is quick write out for choosing bond/money market fund for 25% cash.
http://forums.hardwarezone.com.sg/70899588-post20.html

 

[Mecisteus]

Obviously, benefits of (B) outweights the benefits of (A).

what may be obvious benefits to you may not be obvious to others. just because you got 3 cons over 1 pros doesnt mean that the former is more inferior. for me i can weigh the single pro heavier than the cons.

with 2.5M cash, i could have invested 1M in stable producing dividend stocks like reits or defensives. i could potentially earn 40k per annum base on 4% dividend yields. i could have use the remaining cash to buy a property and rent it out with some cash as buffer. and there are many other things that i can do with the cash to generate me big passive income.

my portfolio is so huge that i dont need to worry about the need to hold large cash as buffer and also i wont try to worry about the market conditions.