International Some Considerations For Investing Globally

For your average punter, is it fair to assume that this minimum would be enough to cover the bare necessities of retirement life? Or is it less a precise prescription and more a general thing?

 

Sorry we need to take a step back. Generally the traditional view is that protection will come from the defensive allocation in the portfolio being cash / bonds. However given we are living longer others worry about inflation so may choose to invest heavily in Equities even in retirement so protecting the growth component of the portfolio is also important. That may include international equities for reasons given in previous posts.

Of course most of us use a combination of both. We personally have a sizable allocation to cash / term Deposits especially being in the early stages of retirement and higher sequence risk zone. But given our level of wealth that equates to around 20% cash / term Deposits which means we are still heavily exposed to growth assets.

 

Hedging reduces volatility of the component hedged, but not the portfolio as a whole imho.

 

Thanks for the replies @The Falcon, @Nordog
What would I search for to find out the downsides of currency hedging for index funds? Tried searching but most of it was whether to hedge and not what the actual problems with it were.

 

It's more expensive.

 

Look for Historical distribution statements hedged vs unhedged.

Having an unhedged basket has historically lowered portfolio downside risk in an AUD based portfolio.

 

A bit rusty on some aspects of hedging but from memory “unhedged” equities actually lower overall portfolio volatility over the longer term and like @The Falcon says are particularly valuable in protecting downside risk.

The counter-argument is that “hedged” equities reduces volatility in the shorter term so retirees in particular might consider hedging. However I, like others, would suggest that one shouldn’t be in equities in the first place if your timeframe is short term, ie less than 7 - 10 years, which renders this argument null and void?

I admit though currency is the one area I’ve struggled with a bit. As I’ve said in the past as a retiree I’d prefer not to have to deal with currency issues but hold unhedged International purely for “insurance” and improved SANF. So probably more for psychological reasons than anything.

 

Thanks @Nodrog (spelt it right this time)

Yes I understand that unhedged lowers downside risk, but having part hedged and part unhedged would serve this purpose. So I am more concerned with upside risk here.

If you were retired, then having part hedged would help you in the short term during draw down phase but you would still be invested in the market for the long term (30, 40, 50 years).
I don't get how this would make the argument for hedging null and void.
For instance, in 2000 the AUD was 0.50 USD, and over then next 11 years it more than doubled vs the USD, so if all your equities were in USD and your spending was in AUD, you would have lost half your purchasing power which I believe would be no different to SOR risk more generally (although compounded on top of usual SOR risk). Even until now almost 2 decades later it is still 1.5x the rate from 2000.
Say you invested at age 50 in 2000, the hedging to reduce volatility in the short term would have helped you over these 2 decades due to not lowering the AUD value of your portfolio, even though you were still to remain invested for the long term.

 

Also it seems my question was asked in an unclear way.
I meant to ask for the technical problems with implementing hedging. Those mentioned included lumpy distributions, tax inefficiency, something about borrowing or leverage. Someone mentioned added cost but not how much.
Would you have a suggestion on how I might be able to find out what those technical implementation problems are?

 

I have asked the question to a high cost Collins St type broker to the rich - and hedging individual positions can be difficult and expensive.

However, the real cost/advantage is more about when and how you implement it. Hedging, currency or otherwise isn't really there to be done constantly, but at times you see as opportune. For example, you could consider purchasing AUD hedged USD ETF's when our dollar is at say 65c or below.

You could compare an instrument such as IVV with its brother IHVV to work out the relative change in AUDUSD to see how much effective transaction cost you would incur.

Now would obviously not be the time to hedge the dollar, but the near future that could change.

 

Predicting currency direction is extraordinarily difficult. I’ve often seen it suggested that rather than trying to adjust hedging based on currency predictions just pick a course then stick with it. That doesn’t have to mean one or the other, it could be a combination of say 50 / 50 Split. 50 / 50 removes the speculative element but covers your ar*e no matter which direction the currency moves, the position of least regret. Then apply the usual rebalancing rules between hedged vs unhedged whether in accumulation or decumulation. That is during accumulation add new cash to the underweight one and in decumulation withdraw from the overweight one. Simple and rule driven.

I’m just an amateur investor so bear that in mind. Also note that I invest in International equities purely for portfolio “insurance” against home country risk hence unhedged serves that purpose much better.

 

Here’s a couple of interesting articles from the Canadian Couch Potato site. Australia and Canada have many similarities. Read the comments also:

Why Currency Hedging Doesn’t Work in Canada | Canadian Couch Potato

Ask the Spud: Is It Time to Hedge Currency? | Canadian Couch Potato

 

Thank you for the links.

Very interesting talk about the correlation of AUD CAD with world markets as opposed to the negative correlation of other currencies, in particular the USD.

He did mention in another one of the links that other than the regarding tracking error example he repeatedly mentioned, that more recently a vanguard fund did not have that tracking error. I wonder if this is one problem that has been solved or not.

In any case, I can certainly see the advantage in retirement to have a combination of VAS, global hedged, and global unhedged. Also interesting that this is also what the Vanguard diversified ETFs have.
Looks like it would strike a nice balance between diversification, concentration risk, franking credits, upside currency risk, downside currency risk, and hedging problems.

 

Great read.
Replies are hilarious, CCP has put forward a thesis and all the Woody Wood Peckers come out of the wood pile with the the “yeah but’s”, “what if’s” and “how about’s”
Strategy of least regrets, sums it up nicely.
Your strategy should be the one that gives you the least regrets.

 

Sounds great. If I ever decided to hedge I would personally use the 50 / 50 Split and rebalance as mentioned in the earlier post. Some low cost Super funds do this given so called hedging professionals often get the calls wrong. Predicting currency direction is considered by some to be even harder than predicting sharemarket direction.

As investors we are all different. My posts reflect my personal situation both financially and psychologically. It was over the top in my previous post to suggest hedging null and void. What I meant is in our position where we want downside and home country risk protection this was more the case. A bad habit with my writing style.

As @Pier1 wisely reinforced each investor may be well served by choosing the position of least regret not just with hedging but all aspects of investing. Why? Because other than saving investing success is more a mental endeavour than a technical one.

 

Re tracking error VGAD (hedged) does a great job Total Return wise. As usual with hedging it’s the split between growth vs income that is all over the place:

 

Yes couldn't agree more about not timing the market and instead going for a fixed percentage of hedged and sticking with it.

Ah yes (re VGAD), their wholesale and retain funds have been around much longer and as you know is the same product under the hood, and the yearly returns they show go back 10 years and they are all also fairly close. Over 20 years it is still a 1% difference annualised which is significant, but having 1/4 to 1/3 of the total portfolio in hedged would make that less of an issue.

How much is dividends are paid out is not an issue for me. The total return is. So that part wouldn't sway me.

Thanks again for the links and your thoughts.

 

I like/need to keep it simples

Purchasing products that smooth volatility through hedging involves additional layers of costs/fees that can impact over the long term, nothing is free. The more cross-currency swaps made, the higher the costs.

Foreign exchange transactions in the global village using hedging total trillions of dollars a day

Here are 3 things to know about currency hedging over equities investments:

Currency Risk Management: Three Things You Should Know

To Hedge or Not to Hedge?

 

The additional cost of hedging on Vanguard’s International ETF VGAD is only a tiny 3 basis points. However TAX on the other hand is certainly non-trivial. If you must hold VGAD then a no / low tax environment is more suitable. Super pension comes to mind. Alternatively if Bill Short-of-a-Brain eliminates franking credit refunds then depending on your circumstance the interest / capital gain component of VGAD’s distribution could be used to take advantage of some of the what would otherwise be lost franking credits on one’s ASX franked shares.

 

Hi all
I am deciding whether my next purchase should be an international ETF, to diversify away from only Aussie LICs. Time frame is 15+ years (could be forever). This would mean I’d be aiming to accumulate to c.15% to 20% international ETF in my portfolio.
I’ve read very very many excellent posts in PC but still none the wiser whether this diversification is necessary as I am in accumulation phase for quite a while. Am I just unnecessarily reducing risk and volatility when I actually have a very high risk appetite due to my long term timeframes?
Can anyone guide me to a couple more questions I should ask myself to resolve it?
Also open to hear that there is no precise answer of course!