Struggling with GBP vs CHF vs USD investment approach

That argument would be perfectly valid… if you’d set aside the efforts of the SNB to weaken the currency - that’s precisely what people forget when they sell their euros or their dollars. When you sell your euros, you don’t get necessarily francs that were circulating in the Swiss economy, you’ll likely get francs “printed under the desk”, basically Monopoly bills backed by the euros or dollars you thought and hoped you’d get rid of. The SNB draws to that purpose 4.3 Billion new francs from the magic hat each month on average since 2008.

I fully agree. Many investors have a clear home currency because they are likely to stay in the same country for retirement, and for them it is certainly best to only hold cash and cash equivalents in this home currency. The most important part in the above paragraph is “in the currency you need it”.

In your case, @Spark, there are two additional aspects to consider on currency risk management:

  • the home currency is not entirely clear, as the future plans are open according to the original post: Switzerland (CHF), Eurozone (EUR), UK (GBP).
  • the current cash is currently exposed a lot to GBP, so that there is also the question of how and how quickly to transition to a more adequate currency or basket of currencies in a moment where the GBP is not at its highest compared with CHF.

I am not talking about the stock part, which was already discussed earlier. Here I mean the cash and bond part.

For these reasons, I would not rush into converting all the cash to CHF right away. I would probably sit down, think about the odds of later living in Switzerland, the Eurozone and the UK and find a medium-term target allocation of currencies for cash and bonds (this is a very personal decision) between CHF and GBP (EUR may be premature at this point given the uncertainty, but it also depends on what “in the next few years” means in your original post). In any case, I would have this medium term target give a major overweight to Swiss Francs because of the medium term certainty of being in Switzerland (and short term liabilities in CHF). Then, I would try to gradually, in the coming, say, 2 years, converge to this medium-term target allocation.

For example, if you are working in Switzerland, you have an incoming cash flow in CHF that can help increase the CHF part.

Again, I am not an investment advisor: these are very personal decisions and I am only sharing how I would do it, based on my own risk-managing personality. I am not familiar with all aspects of your situation. The strategy depends a lot on the possible future plans, and also of the timing: you would clearly want to hold much more CHF if you know you will be in Switzerland in the next 20 years, than if you consider it possible that you return to the UK in the next 10 years…

2 Likes

Thanks again for all the replies!

Re the non stock % of my portfolio, is there a consensus as to invest it in bonds or just hold cash? I will definitely keep some in GBP and CHF cash, but I’m not sure if I should also buy bonds.

If bonds makes sense, then based on the replies here I gather they should be CHF hedged. And that I should avoid Swiss bonds due to the negative interest rate. Any recommendations on the best bonds to look at?

I am already planning to fill the gap on my 2nd pillar as this seems like a safe option with tax benefits.

Cheers

Mark

The question is : what interest rate do you have / could get ? If it is enough, no need to buy bonds. The answer would normally also depend on the investments fees, but you have an IB account so the bonds might make sense for you.

If they’re hedged, you should expect the same (risk adjusted) return as if they were in CHF. Non local bonds add diversification not extra return (which risk-adjusted would be negative).

Interest rate on cash is between 0 and 0.5%, so is basically very little. I was hoping that bonds could offer a better return whilst still minimizing risk.

Sounds pretty high compared to the baseline :slight_smile:

https://www.snb.ch/en/iabout/stat/statrep/id/current_interest_exchange_rates#t2

Hi all. I am having the same problem as Spark getting my head round the currency side. Im probably missing something obvious but to give a practical example of one of my investments as of 5 minutes ago.

Today I look at my investment in ishares Core S+P 500 ETF (invested via CornerTrader in USD)

Trade P+L since purchase is +17% +2252 USD (started investing last year)

Then there are some costs to close

Then there is a conversion loss of -1,117 chf

So my P+L Total (inc costs and conversion) as of today is +941 chf

So my investment on a gross basis is in line with the fund performance. But if I sold today, I would get back that performance less chf 1,100 for conversion.

So it seems that FX plays a part in my investments. Or am I missing something.

My point is, I am fine with Investment risk but i don’t like the big gap between the Trade P+L and the Net P+L and the effect of FX.

Help me understand please, sorry, i am new to this investing business :slight_smile:

You bought S&P500 companies. They are in USD. The currency of the ETF doesn’t matter, but the currency of the companies does.

1 Like

In IB there’s a settings to show number in base currency :slight_smile: Probably cornertrader has that too.

Then you don’t have to think about it.

Let me try:
Let’s say it would be possible to buy ishare core s&p 500 directly in chf: cornertrade would show a gain of 941chf. The currency exposure happens at the stock level (apple, amazon etc), not at the etf (ishare level).
Do others agree?

1 Like

Yes, that’s correct.

1 Like

Ok but that profit of chf 941 is not the ETF performance. That fund is up nearly 20% since I bought it. 941 chf is the ETF performance… less the movement in usd/chf from when I bought it to now.

So I see an FX effect on the performance of my investments.

BTW…I am not arguing that I am right, as there is everyone on here agreeing the other way. Hopefully I am just able to explain why some people struggle to understand it as quickly as the majority.

What you would need to do to get the correct performance is the following (and that’s where it doesn’t matter the ccy you use to buy the etf)

Let’s say your base ccy is chf and you buy an etf in eur that would also be available in chf.

Buy
EUR 1.50 CHF
ETF 10 EUR or 15 CHF
You buy 100 => 1000 EUR or 1500 CHF
So the cost for you should be tracked in your base ccy, 1500 CHF

Sell
EUR 1.20 CHF
ETF 20 EUR or 24 CHF (important, it did double for EUR but not for CHF as the fx between the two changed)
You sell 100 => 2000 EUR or 2400 CHF (which would be exactly the same as if you would have bought the etf in CHF)

1 Like

Hi Tarioch
Thanks for taking the trouble to do an example, and I have just one last question

In your example, the price of the ETF doubled (10 to 20)

But in CHF, I spent 1500, and received 2400.

This is not double, due to FX. So if a swiss ETF doubles in value, so does my Swiss Investment. If I buy a foreign investment, I am also exposed to fx movement.

What am I missing. Im sure its obvious. :slight_smile:

There is more inflation in the countries whose currency is going down. The nominal gain in currency X is not the real gain of the local investor

A good example is if you look at an etf that is available in different currencies

CHF one
https://www.bloomberg.com/quote/VWRL:SW

EUR one
https://www.bloomberg.com/quote/VWRL:NA

As you can see they seem to have different performance characteristics, but if you overlay the fx over this, it will cancel out (it is in the end the exact same fund that you buy).
Important for you is to always calculate in the currency that is important for you. So if you would buy the EUR one and look at the fx it would result in the same performance curve as the CHF one.

I do not think that there is a general consensus on bond vs. cash in the current low-interest environment. I hear knowledgeable people argue on both sides.

20 years ago, with higher interests, there was indeed a broad consensus for passive investors to hold the risk-free part of the portfolio mostly in bonds but still keeping a bit of cash (for example 5% of cash). Today, you will hear many investors say they either hold the entire risk-free part in cash, or a higher part of it. This is especially true in pillar 3a where interest rates on cash are a bit above zero. Others stick to their long-term strategy of using bonds.

Some things to consider:

  • Cash exposes you to the risk that the bank goes bankrupt. There is a guarantee up to a certain level, but if you reach it, you are left with a risk concentration that you would not have with a diversified bond portfolio. This is why there are also monetary funds (<1 year of maturity), but of course at the market rates.
  • While cash sitting on an account may provide the impression of stability, inflation must also be considered. If you leave some cash untouched on an interest-free account for 40 years, while it may be nominally the same, in terms of purchasing power, it can be a dramatic loss. It is important to look at real rates rather than nominal rates.
  • The main goal of the risk-free part of the portfolio is not to generate returns, but to control the overall risk of the portfolio by providing some stability. This is why the stability and safety of the risk-free part plays a bigger role than interest rates.

What makes this call tough at the moment is really the negative interest rates, which are an expected nominal (and sometimes real) loss on average, which is especially true for the Swiss Franc. This is a very unusual environment and nobody really knows how it is going to develop: will it continue? Will inflation suddenly come back? The arguments above would have made a clear case for bonds 20 years ago, but today this is really a personal call and you will find sound arguments either way.

More generally: we have around two centuries of modern experience with stocks and bonds. Millenia with a bit of extrapolation (with gold or currency, for example). There have been many crises, but the patterns have always remained more or less the same. The tough part is that every crisis has a different basis than the former one, so that it will always leave us thinking. You will hear, every time, “Is this time different?” And I don’t know. Maybe it is not. Maybe it is. I just diversify to try to keep the risk as low as possible and not have all eggs in the same basket.

2 Likes

Thanks for the writeup, some good summation points.

I have a very simplistic view, which is probably wrong - so happy to stand corrected.
In my eyes the current choice seems simple (in the short term):
A) Lose the inflation amount by holding cash (for CHF - in 2019 it was 0.36%, last couple of years in the range still below 1%)
B) Lose the amount of negative interest by holding negative yield bonds (not sure what the current going rates are)

For both of which we don’t know what changes come in the mid/long-term.

Hi dbu!

It is a topic in which it can be difficult to say what is right and wrong. I am also not a finance professional. But simplicity can be useful to understand things.

I just wanted to add one point: inflation also applies to B) because bonds are exposed to it as well: they bear nominal values (except for inflation-protected bonds, like TIPS in the US). It means that what you lose is the amount of real negative interest, which is even more negative if inflation is positive. But these days, we do not even know if deflation (as Japan has experienced it over a long period), or negative inflation, may not be a credible possibility, too.

An additional risk with bonds is if interest rates rise, then their market value goes down. If sold before maturity, this can be an additional realized loss. A good reason to stay with short term maturities, which fluctuate less.

And accepting that we don’t know is wise. :slight_smile:

2 Likes
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/