Struggling with GBP vs CHF vs USD investment approach

Hi everyone,

Hoping to get some of the brains on this forum to give their thoughts on my situation. I am struggling to get my head round how best to mitigate currency risk, or if I should even be concerned about it.

I’m in my late 30s, originally from the UK and have been living in Switzerland for eight years. I’m settled here and have no plans to leave but equally could easily end up moving elsewhere in Europe in the next few years. I would say it’s at most a 50/50 chance that I will ever live in the UK again.

I recently sold a property I owned in the UK as it was becoming too difficult and expensive to maintain. I have the proceeds from the sale in GBP that I want to invest. I also have some savings in CHF, and some money already invested in funds, but having sold my property around 60% of my portfolio is now in GBP cash.

Having read a lot over the past few weeks, I’ve decided that I want to invest the majority in ETFs. I’ve set up an account on IB and have already converted some of my GBP into USD and bought into the VT fund, and also bought shares in the iShares Core FTSE 100 ETF (in GBP).

I am thinking that in order to minimize the risk of FX rate changes, my best approach is to a) convert the majority into USD and buy more VT shares b) leave some in GBP and invest that into UK ETFs or into a different world fund (eg. VWRL) and c) convert some into CHF and invest in a Swiss fund (eg. iShares Core SPI).

I’m not sure if that makes sense, or if I am overcomplicating it by thinking I need to invest in two world funds (one traded in USD and one in GBP) in order to spread the risk. I’m also struggling to figure out whether it’s a risk to convert the majority of the GBP into USD in order to invest more into the VT fund. I’ve read that the currency used to buy and sell the fund is less important than the underlying currencies in the fund. However there still seems to be a risk in having the majority invested in funds traded in USD dollar is very weak when I come to sell.

I’m also reluctant to convert GBP into CHF at the moment given how poor the exchange rate is, however I’ve read that I should invest in my ‘home currency’.

I think it is most likely that I will still be in Switzerland when I come to sell so would probably need convert back into CHF, however it could also be that I am living in the Eurozone or even in the UK.

Would love any thoughts on how best to manage the risk. I have read about currency hedged ETFs but I’m not sure if they make the most sense.

Thank you!

If you buy stocks you don’t have much currency risk, because you own the company not any kind of money.

You have the risk that US economy could collapse (because it’s currently like 60% or so of the global index), but that has nothing directly to do with the currency USD.

What you are thinking of doing is called Home Bias, and it’s usually not considered a good thing.

Currency hedging also doesn’t make sense for stocks… It’s kinda hard do explain why not, but imagine if you would add a currency hedge to the value of a gold bar. Would that make sense?

It only makes sense for foreign bonds, because they are some kind of money. And you want it to be like it was in your local currency, because it’s the safe part of a portfolio.

1 Like

If you buy a fund composed of

LE NEST - 109 CHF
PB - 3 GBP
BANANA - 385 USD

It doesn’t matter if you buy a version that cost 500 USD or a version that costs 400 GBP. Because you will owns the stocks.

That would obvously help if you knew what you will do.

The first question is : What do you want to own (asset allocation) ? Your answer : mostly ETFs. Do you have any reasons not to buy the world ? In your case, no. So, convert your money in USD and buy VT.

The next question is : what about the rest of your money. You have CHF and GBP. I guess your salary is in CHF. What interest rates do you have on your accounts ? There is the concept called the parity of interest rate. If the market think a currency will go down, it will have a higher interest rate and a currency which the market think will go up will have a smaller interest rate.

In february 1971 the GBP was 10.41 CHF. In november 1977 it was 3.93 CHF. In december 1985, it was 3 CHF and so on. The exchange rate between the GBP and the CHF has “always” been the worst ever, just like the stock market hits “always” new records. Same with any currency. USD was 5.5 CHF in 1800 (I don’t know how they calculate it before 1848 but whatever). CHF was 0.8 french franc (80 old francs that became cents later.) and and now the CHF is 6 french franc (in euro).

Conclusion : you can in theory keep your money in any currency, over the long term you will end up with the same ammount, as long as you have the “market” interest rate, or even a better interest rate. People prefer their home currency because there is obviously fluctuations.

Currency risk is really a risk when you plan to invest in a more weaker currency because of their volatility range. But at the end every currencies with no exception will be close to zero. But this currency risk will kick in when you invest in something which might not be enough liquid - for example bonds. There you have to stay in the bond until it expire, and get your yearly return maybe in a currency which gets weaker 2-3% every year.

When you invest in global company and there are many in UK as well (or in VT), you mitigate this risk. And if you would feel this risk still valid, then buy some percentage of gold in your AA to hedge it for the future.

(off-topic)

not sure that’s truly correct, the causal relationship can also be reverse, interests of major currencies are often set by central banks (which in turn will indeed influence FX rate over time).

The market : "Hey guys, the CHF is as safe as gold, let’s buy it. It will go up and we will even have 1% on our savings account.

The SNB was then literraly forced to lower the interest rate.

Hi Spark!

The funds you mention seem to only be stock funds. Having the entire portfolio invested in stock is unsuitable for many people and it is important to assess if a percentage, and how much percentage, of the portfolio should be in a risk-free asset (cash or bonds). This is a very personal decision that depends both on your personal situation and your personality, and your bank advisor may be able to help here. Not having defined this percentage can have dramatic consequences in case of sudden market movements, because it makes it tempting to act under one’s emotions.

Stocks do expose you to currency risk, however the currency risk is not necessarily the one one may think. A company could be headquartered in country A and listed in the currency of country A, but conduct business in country B and be exposed to the currency of country B. This is especially true of multinational companies. It makes it difficult to hedge currency risk for stocks. People disagree on whether or not to do so. I don’t, but I know others do. If you choose not to, then for the stock part of your investments, it is irrelevant that your current cash is in GBP. Spreading the purchases of stock over a few months to a year is known to give some peace of mind, but it is mostly psychological (assuming future market prices cannot be predicted). Also, as other posters said, the currency in which an ETF is listed is irrelevant, it is only a choice of display; what is relevant, and important, is to check whether an ETF is hedged against a specific currency or not.

Now, for the bonds and cash, it is a different matter, because bonds are the risk-free part of the portfolio and should not be exposed to too many fluctuations, because it is the way you keep the overall portfolio risk under control. It is wise to have it only exposed to one’s currency of choice, typically one’s home currency but this is because this is the currency that one also plans to use for retirement. Some people only buy bonds in their target currency, others do so but also buy bonds in foreign currencies that they hedge against their target currency to diversify the issuer risk more broadly. There is no consensus on which is better.

For somebody who is uncertain about where they will be in the future (I am in this situation, too), this can be adapted by exposing the bond and cash part to several currencies, in this case both GBP and CHF. In fact, it could even offer some rebalancing bonus with short-term fluctuations. However, I would probably still organize more currency exposure to the currency of where I am now, in case money needs to be withdrawn from the risk-free part for unexpected reasons (but also noting that it is wise to only invest money that one will not need in the short or medium term, so that such situations do not happen in the first place).

When switching countries, the stock part should be rather unaffected because it is not biased towards any currency (except for those who overweight a bit their home country: home bias, which may reduce a bit short-term fluctuations. This is common practice even in pension funds). In the worst case, one sells, transfers, and buys the same thing again.

And the bond part should only be affected to a limited extent if it already contains some bonds in the currency of the new country (hence the importance of good planning).

[Disclaimer: this is not investment advice, only the sharing of experience]

5 Likes

No employed person in Switzerland is 100% invested in stocks.
Your (1st and) 2nd pillar is part of your net worth and “asset allocation”, and many consider it as the bond-like part of their portfolio.

2 Likes

This is important, bonds should be hedged, otherwise they are more volatile and that is the opposite of what you want.

2 Likes

This is a very fair point, indeed many think in this way and it makes sense to me as well. I depends on the level of confidence that one has in their future value, given changing demographics and political uncertainty on the future of the first two pillars; it also depends on the coverage ratio of the pension institution.

Even though from our employee’s viewpoint, looking at the yearly certificates, the second pillar behaves like a risk-free investment, the pension institutions themselves are investing significant portions of retirement assets on the stock market and in real estate (it is very transparent and can easily be seen in yearly reports and balance sheets). If there is a tough recession, some pension institutions with insufficient coverage may suffer, as their liabilities (towards retirees) remain constant.

Another aspect that weighs in the balance is that funds from the second pillar are only available under specific circumstances, and those of the first pillar (except in unfortunate situations) are not available at all until 62 or 63. This may affect the ability to rebalance in a market downturn. Also, the risk-free part of the portfolio also plays the role of supporting withdrawals in a scenario of early retirement, to avoid selling stocks.

In the end, there is no right and wrong answer on how to think of the buckets within which to allocate assets. It is a personal decision to make and the most important is to read and learn as much as possible, and to have a clear strategy. The age plays a role too: a 20-year-old will think of their second pillar in a very different way than a 60-year-old.

1 Like

Hi everyone

Thank you for all the replies - super helpful! I shall take time to read them carefully…

I must admit I’m still struggling with these parts: ‘the currency in which an ETF is listed is irrelevant’ and ‘you can in theory keep your money in any currency, over the long term you will end up with the same amount’

Let’s say someone in Switzerland has 200k GBP to invest on ETFs. They convert 100k GBP into USD and buy a world ETF traded in USD, and then they use the other 100k GBP to buy into the same ETF but traded in GBP. 5 years later, they sell all their shares and convert the USD and GBP into CHF. During those five years, the GBP has weakened against the CHF. Doesn’t this mean that they would get a better return from the ETF traded in USD than they would from the one traded in GBP, even though they invested exactly the same amount in both? And if that’s the case, then the currency in which the ETF is traded IS important?

I’d encourage you to actually play that scenario on paper, it’s not very complex and it’s a good exercise to grasp those things better.

Like just write what you hold at each time (ETF, GBP, USD), and compare various scenarios.

1 Like

LE NEST - 109 CHF
PB - 3 GBP
BANANA - 385 USD

You will have 250 shares of that ETF in GBP (250 * 400 GBP) and 250 shares of the equivalent ETF in USD (250 * 500 USD).

CASE 1) Let’s imagine GBP will be 1 CHF and 1 USD in 5 years. Stock price didn’t move. :

Your GBP ETF will have a value of 497 GBP (109+3+385). You convert it in CHF and you get 497 CHF.

Your USD ETF will have a value of 497 USD. You convert it in CHF and you get 497 CHF.

CASE 2) Let’s imagine GBP will be 0.5 CHF and 1.1 USD in 5 years. Stock price didn’t move. :

Your GBP ETF will have a value of 109/0.5 + 3 + 385/1.1 = 571 GBP. You convert it in CHF and you get 285.5 CHF.

Your USD ETF will have a value of 109 * 2.2+ 3 * 1.1 + 385 = 628.1 USD. You convert it in CHF and you get 285.5 CHF

2 Likes

Hi Spark!

There are two different things said in these statements.

The currency in which an ETF is listed is irrelevant: this can be seen in REandSTOCK’s post, where you can see that it does not matter in which currency the (same) ETF is purchased. One way to think about it is that the ETF contains something tangible: company shares. Imagine an ETF containing in total X Apple shares and Y Amazon shares in each unit. One unit is listed today at, say, 100 CHF or 89 GBP or 107 USD depending on the exchange. Once you have bought it, in any currency (the amounts are the same at today’s rates), the result is the same: you have X Apple shares and Y Amazon shares. The same would be true if you purchased anything tangible, like a book: paying 10 CHF or 8.90 GBP or 10.70 USD, at today’s rates, is irrelevant: you have one book no matter what currency you bought it in.

The second statement, however, is a bit more complicated. Currencies experience short-term and long-term fluctuations. Short-term fluctuations are mostly impossible to predict, because, as was said, FX is the most liquid market in the world. Long-term fluctuations tend, on the other hand, to follow the difference of interest rates, itself close the difference of inflation. This is why GBP and USD tend to lose value against CHF: because the inflation for CHF is significantly lower than that of GBP and USD. This loss of value is roughly compensated by the higher interest rates, which is why in the end, over decades, it does not really matter which currency one holds (except if its emitter is experiencing a crisis, of course). One way to put it is that real rates are not really currency-dependent. As San_Francisco says, these are long-term theories to be taken with a grain of salt. They are based on past observation and on people purchasing currencies rationally (carry trades), and it can take a large number of years for differences between currencies to become less perceptible. This long-term horizon justifies for some people not to hedge the currency risk of stock to save on the costs of hedging, but it is clearly not compatible with the risk/return properties of other asset classes such as cash or bonds.

The real issue for an investor is the short-term FX fluctuations; this is the reason for holding the home currency (or currencies that one will need in the short to medium term) in the risk-free part of the portfolio, or for hedging any foreign bonds. Indeed, the risk-free part of the portfolio is supposed to be stable and not fluctuate in terms of purchasing power.

You’re buying (shares of exactly) exact same thing.

  • Let’s assume that 1 share of yourETF has a market price of 100£ on London stock exchange today
  • Let’s also assume that 100£ = 120 CHF at today’s exchange rate
  • You’re having 100£ to invest as of today.

What would you expect today’s price for yourETF to be at the Swiss stock exchange as of today? Considering, that money can be exchanged and moved from Britain to Switzerland and from GBP to CHF and vice versa practically instantly and for free (and the fact, that yourETF is the same thing regardless of where you buy it)?

Say yourETF makes a distribution of 1£ today. What’s the amount you would be credited in CHF? 1.20 CHF at today’s exchange rate. Why should it be anything else?

This is always true: The relation between GBP and CHF prices for yourETF will at all times be determined by the GBP/CHF exchange rate.

If yourETF’s price would be 100£ in London and decrease to 100CHF in Zurich, given the same exchange rate of 100£=120 CHF, what would happen?

Big institutionals would flock to that arbitrage opportunity and (literally) drop billions of CHF on the table to buy as many shares as they can in Zurich (at 100 CHF a share) and simultaneously sell as much as they can at 120£ in London. Simple arbitrage. Free profit, free lunch.

Of course that doesn’t happen. There might be minuscule and/or temporary such price differences between the two markets and currencies - but they’ll be negligible to you as a long-time investor.

This is a theoretical statement. In practice, you can very well lose or gain on currency fluctuations, since central bank interest rates are often “artificially” set and do not necessarily reflect supply and demand.

3 Likes

There is of course fluctuations, but let’s look at an example.

  1. You put 1000 USD (=1000 CHF) on a us savings account at 1.5 % during 3 years. You end up with 1045.68 USD.

  2. You exchange your 1000 USD into 1000 CHF and you put them on a swiss savings account with 0.5% during 3 years. You end up with 1015.08 CHF.

In theory, the exchange rate after 3 years will be 0.9707 CHF for 1 USD.

4 Likes

Hello - thank you for the very detailed reply!

Good explanation.

A good and detailed text on the topic, in german, is here:

1 Like

Thanks, Neville! Gerd Kommer is definitely a good reference, I read several of his books and found his viewpoint, built on a lot of historical data, very insightful.

By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, vous confirmez avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/