Permanent portfolio in different currencies

Investing / Portfolios
1

Not knowing in which country I’ll end up living, I have invested my equities in different currencies. But does having stocks in USD, a house in the eurozone, long term treasury bonds in SEK and cash in GBP make sense? Given how central banks work, shouldn’t I rather create multiple permanent portfolios, that is, one for each currency?

I’ve been wondering about this for a while, which makes me think that I don’t truly grasp the concept of the permanent portfolio.

Bonus question: can one ever replace treasury bonds with corporate bonds?

2

No, it makes no sense at all.

Once you exchange currency for an asset, you no longer hold the currency and only the asset. Doesn’t matter which currency you use to buy that asset.

4 Likes
3

I’m confused which of my sentences the “no, it makes no sense” applies to.

I would like to truly understand the mechanisms of the 4/4 equilibrium of the “permanent” portfolio. Inflation is local, central banks do influence the value of local bonds through their interest rate adjustments, currencies do gain or lose value.
Maybe I understand the concept completely wrong, but doesn’t the “permanent” equilibrium rely on the idea that the 4 differents kinds of assets are correlated / anticorrelated in value? If so, how could a rather decorrelated mix not influence the portfolio’s overall balance?

4

There is a concept called the parity of interest rates. If the USD will loose value, there is a 1-2 % interest rate on savings accounts. If the CHF will gain value, there is a 0-1% interest rate. If USD loose 1% a year against CHF, you end up with the same value after time.

5

Sorry for not being preciese. You mentioned having equities split between currencies.

The equity market is an inter-connected system with companies themselves being exposed to multiple world currencies all at the same time. There is a self-compensating effect at play, which means that any currency movements will have a low long term effect on your portfolio.

Unless you only invest in small caps with exposure to the local markets, the currency effect is neglible.

6

And for fixed income/cash, yes it usually makes sense to have those invested in the currency/currencies you care about.

(otherwise the FX fluctuations will dwarf everything, fixed income is usually to add stability/decrease risk in a portfolio)

7

Oh, I had never heard of this interest rate parity theory, thanks for introducing it to me!
I guess it would indeed be applicable if I was making short term investments (<1 year) and or planning to convert my assets back into a specific currency soonish.
I realize I should have elaborated more on my quite specific situation. Here I’m planning all the way towards retirement and will possibly live in different places, so never convert back.
Thanks everyone for helping me making sense of this complexity!

8

It is always applicable, because opportunity of arbitrage don’t exist in theory. It doesn’t depend on the time horizon or on the currency.

I have a CHF savings account with 1.25% so I guess I am beating the whole world. :slight_smile:

9

The only currency risk you have are the bonds in SEK and the cash in GBP. All the other things are not tied strongly to the currency.

The stocks and house are like a physical gold bar. If you found an old one in your grandparents basement and want to sell it… would it matter what currency they used to buy it?