How do you hedge your currency risk?


#41

Lets say I plan to live my entire life and retire in Switzerland.
Is it worth it to have a small percentage of your portfolio in the swiss market say 10-15% to mitigate exposure to other currencies?

The argument against that would be home bias and increased risk, because my income comes from switzerland. That got me thinking, what catastrophic event could occur only in switzerland that would tank the local market, lose me my job, but leave ROW untouched?

An argument for this strategy would be that Switzerland has performed quite similarly to any World index, I also believe it will continue to perform better than europe and say japan in the longterm and better than EM shortterm.
Maybe switzerland is quite a sound investment, what are your opinions?


#42

That is an interesting statement…
Below is the total return performance of the Swiss market over the last 20 years. 22% over 20 years makes 0.9% per year on average. I am not sure it even beats inflation.

MSCI World on the other hand went from 1141 to 2044 on the same period, which makes 83%. Not incredible, but already better (3% per year) (I could not find on this graph if it was total return (including dividends) or not).

Maybe Switzerland will continue to be a stable country, as it always has.
Or maybe the Swiss National Bank will have printed so many franks that the whole Swiss economy will tumble.
Or Maybe Switzerland will do just fine, but US will collapse with all their debt.
Maybe Japan will wake up from two decades of non-returns and become a competitive stock market again.
Or maybe not.

My point is, if you start indexing, you do not want to guess what will happen to a given country over the next decades. So your best hedge is to buy companies making earnings everywhere in the world, so that what happens in one country has less effect on what happens to others. This is what a world index does. This is what the S&P500 or VTI does as well in a certain measure, since all those companies make money all over the world (even if they are incorporated or listed in the US).

All this global flow of earnings is the best hedge against any currency risk.

Don’t forget that, over the long term, the valuation of an index is how much value and earnings its companies are creating. It does not matter in which currency it is expressed.


#43

Where did you get that chart?? The best measurement I have for the Swiss market is the SXGE index - Swiss Performance Index Total Return. That’s the top 200 companies. Here’s a link to the chart.

And here’s the actual chart:

Starting at 1000 in 1987, reaching 10800 in mid 2018.

CAGR = (10800/1000)^(1/(2018.5-1987)) - 100% = 7.85%

Not bad, I’d say.


#44

I can tell you my case. I plan to retire in Europe. Didn’t limit myself to a single country, it helps with FIRE to be flexible. I hold 100k of VEUR at Corner Trader and I don’t intend to make any further buys all sells there. I did it because of the following reasons:

  • I already had money with CT prior to IB and needed to do something meaningful with it
  • Keeping money with CT provides some broker diversification
  • VEUR can be purchased with CHF, without currency exchange
  • VEUR is not affected by American withholding tax stories
  • VEUR should in some way reflect the European economy, so if it fares well and prices go up, this ETF will offset this, if the ETF does badly, then probably the economy will not do so well and the living costs will be lower

#45

It’s a tricky problem to solve. I stick to USDs as I’m not sure yet where I’ll retire (and what currency I’ll need). But if I were sure that I’ll stay in Switzerland, I’d rather keep and increase the bond/cash portion of my portfolio in CHFs over time. I’d rather keep the equity part in USDs to not expose myself to risks and costs of home bias and/or currency hedging.

On the other hand, I’m planing to diversify the broker accounts, so I’ll keep some CHF investments at CT eventually anyway (but this rather will be global portfolio of ETFs, I don’t want to overweight Switzerland).


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What about Gold?
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What about Gold?