Pros/Cons for VGS or VGAD

Succumbed to some tilting, I liked the Six Park Portfolio's addition of DJRE & IFRA and thought why not whilst the market was down and I had some funds

This guy sounds like he's on the ball

I need this posted next to the computer ...keep it simple

 

I like six parks portfolio @Redwing. DJRE is unhedged, IFRA is hedged and neither of them are Vanguard. Helps to mix things up a bit when you add them to VGS/VGAD for international exposure

 

Just thinking could you have a rule in your financial plan that when you have spare cash and the AUD/USD is below the long term average of $0.767 that you would buy VGAD and when above buy VGS?

 

I want a margin on these types of decision. VGS is my preferred international exposure so I have a higher hurdle to purchase VGAD than the middle ground and only plan to maintain desired allocations using VGAD when I see/feel VGS will suffer strongly due to currency.

 

Thank you for replying, from what has been discussed over time it would seem around the $0.65 or lower would be a possible trigger to at least consider VGAD. If that is the case there has only been a few brief periods in time when that has occurred in the graph.

 

I use a rule-based decision for choosing between VGAD and VGS

A couple of thoughts on your chart.

Interestingly because of the math “Average” currency will always be higher than median. Do you want to know average, or do you want to know the currency point where half the time price is above and half below? Or if you have a preference like @Hodor maybe the point where currency is below 25% of the time etc.

Do you want to know a static mean (mean reversion wash theory) or do you want to know a trend (currency reflect country economic fundamentals theory)?

Does an AUD/US dollar show A$ weakness or US$ strength? Not an issue if your diversification is only into USA but a broader measure of A$ performance is TWI.

End of the day though it doesn't really matter how detailed your rule is trying to be as its just an excuse to take one action over another in the face of an unknown future and no rules can deal faultlessly with the unknown. But rules do make decision making easier for me, so I tend to use them, one rule matrix upfront takes care of many future decision points.

 

I just read the above six times and thinking about does it really matter to me and what I can do about it.

Then I continued on...

 

Thanks dunno and Hodor

Being a long term investor I will stay invested through the market cycles which I think over the long term will reduce volatility by being unhedged in international equities.

 

Chose VGAD today.
FX rate around 0.645.
Don't mind lumpy distributions, rate a bit below long term average and sort of easier to understand the price movements (sans distributions).

Plus already had some, so didn't want another holding!

 

Sorry, what does TWI stand for?

 

Trade weighted index

 

If I understand correctly is it your intention to own VGAD only and not VGS at all?

 

On a re-read I can see it may be misconstrued. The fact that I didn't need another holding was just a lucky by-product of the decision. Of course I will attempt to play the currency timing game in future and get VGS! I've got nothing else to do now that I'm just in index hugging investments!

Edit: previous VGAD purchase was at around 0.56 FX rate. Seemed obvious choice.

 

I know that generally this forum doesn’t cotton to market timing, but I have to admit that I am grateful to @dunno for previous posts about diversifying into VGAD instead of just holding VGS.

Doing that when I re-allocated a while back has been a useful breather.

 

One theoretical viewpoint is maintaining a strategic allocation between VGS and VGAD, based on your currency risk tolerance. IE if you are worried about currency fluctuations increase VGAD allocation, remembering your VAS, house, job, car are all in AUD too.

You can also play around the edges with a dynamic allocation based on exchange rate. But as @dunno says, it probably won't matter much if you are holding for 20 years.

The more often you try to predict individual random events, the more you are gambling. The more you gamble, the more you lose.

 

With this decision I don't see it so much as "trying to predict individual random events". I see it more as making a calculated decision about what is more likely. For example, if the AUD were to be down around 50c against the USD when I was ready to buy it is significantly more likely that over the long term it will rise back up to somewhere near its long term average than it is to drop much further. That rise will have a detrimental impact on the investment so why not consider protecting against that risk?

Having said that, with the way the AUD is going by the time I'm ready to purchase it will be near its long term average anyway.

 

Looked at it, considered it, dismissed it. Another aspect I would likely need to monitor which would add to complications I don't need or want.

 

That was my theory as well. I wanted to rebalance from my overly Australian biased portfolio to a more globally balanced one anyway and used some tax loss harvesting in the middle of the carnage to do it.

Whilst long-term VGS and VGAD have produced similar results, when the market reached its (current) nadir in late March and the dollar dived, VGS held up much better whilst VGAD matched the dismal performance of the OZ market.

It has proved to be a wise move given the recovery and rise of the AUD.

Of course now that I am timing the market one wonders how to time it for.?

 

50/50 hedged/unhedged seems to makes sense to me when working in a portfolio with periodic rebalancing. As AUD is “risk on” you will typically be rebalancing into the hedged product in a down market. That’s good enough for me. I only do rules of thumb these days as my head hurts.

 

All our investments outside Super are in AUD. So I like the fact that VGS gives both equities diversification and currency diversification. Two birds with one stone kind of thing. However, I do like your idea for the SNAF regarding currency risk. I'm also leaning toward a rule such as "VGS unless the AUD is below 65c against the USD." Both seem simple enough to implement.