How to invest during weak EUR, high inflation, and meek interest rate?

[kcnalp]

Hey,

I'm a bit confused and nervous with the current situation (title).

Currently, I'm DCA-ing MSCI World+EM with the classical 70+30 proportion.

Seeing EUR-USD rate, stock market going down, and the inflation makes me question my investment strategy.

What are the best alternative?

1. Buy EUR hedged MSCI (or rather S&P 500): betting that the higher TER+Tax when EUR regains its strength won't eat up the currency gain and S&P return. The stock market is going down though...
2. Buy (US?) Bonds now that the Feds and ECB hiked the interest rate: betting stock market wont recover anytime soon, and the YTM won't be eaten by currency risk and the opportunity cost for future stock comeback.
3. Buy gold as store of value now that it's cheap: betting it will goes up again when interest rate is going down. Reinvest to usual MSCI World+EM. Currency risk is there though, gold price RN in EUR actually is pretty high, thanks to EUR/USD rate.
4. Buy USD: betting EUR will go down further, and buy back EUR when it regains strength, reinvest to usual MSCI World+EM.
5. Some/all of them, but at what proportion? I can only DCA €1000 p.m., so my options are limited.

Option #1 and #2 are definitely taxable where I live, 3 and 4 is nice from tax perspective as they are tax free after 1 year holding period.

Thoughts, please? What are you guys doing

EDIT: I'm super grateful with all these answers, some of y'all took your time explaining the basics to me.

 

[boxer_dog]

@kcnalp VWCE and chill

 

[alyvia]

@boxer_dog What platform do you use? I have been using eToro, but everyone seems to think it’s garbage. Where should I look please?

 

[boxer_dog]

@alyvia IBKR and chill

 

[chainsaw1]

@alyvia Trading212?

 

[kcnalp]

@boxer_dog Lol okay.

 

[boxer_dog]

@kcnalp Why the irony? This is literally best strategy

 

[kcnalp]

@boxer_dog There was no irony or anything malicious.
I lol-ed at the short and sweet answer.

 

[ephai]

@kcnalp

What are you guys doing?

I simply stay my course. I'll keep buying non-hedged global equity (as an aside, you are investing in emerging markets more than twice their market caps - that's a big tilt...) and EUR-hedged bond funds and straight up ignore whatever nonsense the market pulls next. A ship does not adjust its route to dodge the waves.

Depending on what happens next, any or all of the options you mention might end up being more profitable than mine, or less: I don't know, and I don't care.

What I do know is that my current allocation is very likely to allow me to reach my long-term objectives, if I stay the course and keep investing as much as I reasonably can; and that, however, that likelihood starts decreasing sharply if I begin reacting to events by fiddling with it (this is not going to be the last crisis that'll happen during my investing career, nor very probably the worst).

 

[kcnalp]

@ephai

I'll keep buying non-hedged global equity

Did you try check your ROI decrease when EUR regains strength, and you accept it?

you are investing in emerging markets more than twice their market caps - that's a big tilt...)

I think sizable of EM rising (or rather moving to a developed market) is within my investment horizon, thus the early exposure.

and EUR-hedged bond
So #2, what ETF do you recommend? Does it have good TD?

What I do know is that my current allocation is very likely to allow me to reach my long-term objectives

My problem is with my limited income and future plan, I wont be able to. That's why I'm nervous. The EUR depreciating screw up my projected curve.

I reasonably can; and that, however, that likelihood starts decreasing sharply if I begin reacting to events by fiddling with it (this is not going to be the last crisis that'll happen during my investing career, nor very probably the worst).

That's fair enough, I'do the same if I can afford to do so.

 

[ephai]

@kcnalp

Did you try check your ROI decrease when EUR regains strength

What is this "checking" thing you talk about?

But really, in the long run the expected return of currency fluctuations is zero. I don't know when (or even if) the EUR will regain strength over the dollar, and I'm not interested in attempting to guess - forex speculation is the sort of thing that's too foolish even for wallstreetbets - but in the long run, I'm as likely to benefit from currency fluctuations as I am to lose profits from it. I want my bond investments to be low-volatility, which is why I pay to keep them hedged; but otherwise, I wouldn't worry too much about that.

I think sizable of EM rising (or rather moving to a developed market) is within my investment horizon, thus the early exposure.

The question is whether your understanding of the possibilities - and of the challenges - of the emerging markets is more accurate than what the global market has already priced in. Personally I'm not convinced; but ultimately I don't think it's a huge deal - your portfolio might overperform or underperform a little one that follows market caps, but I don't see a scenario in which one will do great and the other will do awful.

My problem is with my limited income and future plan, I wont be able to.

Then - sorry if I'm being callous - it seems to me that you need to increase your income or downgrade/revise your future plans (or a combination of both).

I understand thay it's easier said than done, but I think that in the long run working on these two aspects is likely to bring you greater benefits (and much less likely to actually harm you) than attempting to change your asset allocation in response to world events.

Being able to invest 1k EUR per month is not bad at all IMO, anyway. Some can invest more and others less, and as I said if you'd like to be able to invest more by all means work on that, but it's already a solid amount by most reasonable standards.

 

[kcnalp]

@ephai

What is this "checking" thing you talk about?

Like adjusting your current investment rate with EUR devaluing and see how much it affects your projected ROI.

Sure you cant predict when EUR will recover, but with even at 2-5y DCA you start to see the effect, and you have to bet EUR is reigning supreme for the next 2-5 years so the expected currency fluctuations becoming zero.

But really, in the long run the expected return of currency fluctuations is zero. I don't know when (or even if) the EUR will regain strength over the dollar, and I'm not interested in attempting to guess - forex speculation is the sort of thing that's too foolish even for wallstreetbets - but in the long run, I'm as likely to benefit from currency fluctuations as I am to lose profits from it. I want my bond investments to be low-volatility, which is why I pay to keep them hedged; but otherwise, I wouldn't worry too much about that.

Can you tell me what does "long run" means?

I keep reading articles why hedged equity is bad, etc, but the investment horizon and selected ETF seem to be cherry picked to fit the analyst perspective. I also have learned it the hard way that "past performance is not indicative of future results".

The question is whether your understanding of the possibilities - and of the challenges - of the emerging markets is more accurate than what the global market has already priced in. Personally I'm not convinced; but ultimately I don't think it's a huge deal - your portfolio might overperform or underperform a little one that follows market caps, but I don't see a scenario in which one will do great and the other will do awful

I grew up as part of emerging market. Call it sentimental judgement, but there are local economic aspect that cannot be modelled yet by the "global market". Forget the return, I understand the risk at the very least, e.g. when the local ruler is coup d'etaed or the govies made some idiotic populist economic policy.

Then - sorry if I'm being callous - it seems to me that you need to increase your income or downgrade/revise your future plans (or a combination of both).

Not at all, everyone situation is different, this is just happened to be mine.

With regards to improvement of income and downgrading future plans: with or without the EUR devaluating, or any global economic changes that's on the table (very true, easier said than done).

I like to keep them as independent variables, so it is clear when I want to see the effect.

 

[ephai]

@kcnalp Insofar as what the EUR will do against the USD next can be predicted, it's already priced in. For example, suppose that it was reasonably sure that EUR will rise again: then, all other factors being equal, shares of an European company would have a higher price than shares of a comparable US company, since everyone (American, European, or anything else) would expect the exchange rate change to give them a nice extra payoff.

Can you tell me what does "long run" means?

Perhaps 20 years or so? But note I talked about expected returns: EUR might strengthen against the USD or it might weaken, but there's no particular reason to bet on one of them rather than the others (the current exchange rate already reflects everything that is publicly known about the matter).

I keep reading articles why hedged equity is bad

I don't think that it's that bad, personally. Basically, you are paying extra fees (ones that currently are actually kind of high, because of the difference between interest rates) and hence accepting lower expected returns in order to get rid of one potential source of volatility. The natural objection to that is that, even without currency fluctuations, equity is still plenty volatile anyway, and while it makes sense to pay to reduce volatility for instruments that you want to be relatively stable (e.g. bonds) equity's not going to be that anyway.

This is true; but on the other hand, what actually matters is the volatility of one's portfolio as a whole, and if one wants to reduce that without reducing their equity exposure then hedged equity funds are IMO a reasonable choice.

What is less reasonable, as I see it, is to keep moving from non-hedged funds to hedged funds and vice versa in response to events. This is likely to be much worse than picking one or the other and sticking with it, because once we learn of a situation the market has already reacted to it.

So yeah. As I see it, if you dislike the effect of currency fluctuations on your portfolio and are willing to accept lower expected returns to get rid of them, that may be a reasonable tradeoff for you (it kinda runs counter what you say about needing higher returns, though).

But if make that choice, you must be committed to it: if you are instead planning to weave in and out of hedged funds to take advantage of currency fluctuations, I think that's not likely to end well.

 

[kcnalp]

@ephai

then, all other factors being equal, shares of an European company would have a higher price than shares of a comparable US company, since everyone (American, European, or anything else) would expect the exchange rate change to give them a nice extra payoff

Hmm.. but I'm buying MSCI world which contains US and EU stocks. So price raise of EU stocks will also raise the ETF price overall. Or are you saying US company stock value gonna decrease?

Suppose I'm buying X position if I buy non-hedged, and X+5 positions due to currency differences. All things being equal when Euro raises, the hedged (X+5) position gonna make more return than (X) of unhedged. Note that I buy in DCA (ECA? ) not a lump sum, if Euro were to continue fall till some point, I get to buy cheaper and cheaper until that point, thus X+n.

Perhaps 20 years or so?
I dont have crystal ball, but I was hoping EUR-USD would normalize before that and I can rebalance to unhedged. Is it not realistic?

In 10y I dont know if I will DCA monthly like now (vulnerable to currency volatility), or I have flexibility to hold my capital and diversify it to not worry about market condition, but I'm working toward that.

ones that currently are actually kind of high, because of the difference between interest rates

Can you please explain or paste me the link to the explanation how the difference in interest rate between US and EUR affect ETF Tracking Difference?

The natural objection to that is that, even without currency fluctuations, equity is still plenty volatile anyway, and while it makes sense to pay to reduce volatility for instruments that you want to be relatively stable (e.g. bonds) equity's not going to be that anyway.

This is true; but on the other hand, what actually matters is the volatility of one's portfolio as a whole, and if one wants to reduce that without reducing their equity exposure then hedged equity funds are IMO a reasonable choice.

Valid point yes, I'd like to decouple the currency volatility to that of equity. Sure equity can be down, but I see little point on adding fewer value to my portfolio just due to (avoidable) currency difference.

What is less reasonable, as I see it, is to keep moving from non-hedged funds to hedged funds and vice versa in response to events. This is likely to be much worse than picking one or the other and sticking with it, because once we learn of a situation the market has already reacted to it.

But the alternative being I DCA fewer, and fewer (excluding the equity value itself) every time while it's pretty clear EUR-USD arent going up anytime soon. Is this reasonable to you?

But if make that choice, you must be committed to it: if you are instead planning to weave in and out of hedged funds to take advantage of currency fluctuations, I think that's not likely to end well.

I would like to understand why, I already see Taxation is factor, and there is hedging cost, no matter how low. I dont know yet if the currency gain is bigger than these given costs above.

 

[thehardertruths]

@kcnalp I'm just weathering it for a few years until it gets better, dca and time in the market beat timing the market.

I'm not smart or lucky enough to make any of those options make more money

 

[kcnalp]

@thehardertruths Absolutely. I'm planning also to DCA-ing those options, as I have no lump of cash.

.. but my question is DCA-ing what?
DCA-ing USD denominated asset, while the EUR is going down seems to be counterintuitive.

time in the market beat timing the market.

Ken Fisher is lucky he doesn't have to worry about currency risk.

 

[peterson1111]

@kcnalp It seems that the dollar keeps getting stronger and it already strenghted 20% to EUR, which makes our invesments in CSPX and SXR8 questionable.
Even if we DCA with this excange rate our ROI will be way smaller when the dollar weakens to normal levels in couple of years.

Example 1:
1. As right now eur/usd is -20%
2. Lets say I invest €100,000 right now in CSPX or SXR8
3. In couple of years CSPX recovers +20%
4. But eur/usd also recovers +20% to its normal levels
5. In this case I did not make any money and my ROI is 0%

Example 2:
1. I invest €100,000 in EUR Hedged ETF like IUSE
2. In couple of years market recovers +20%
3. Due to this ETF is hedged it is also going to be ca +20%
4. Down side of IUSE is 0.20% expanse ratio
5. In this case I my ROI = +20% - IUSE expenses(lets say 5%)
6. Sell all IUSE and buy CSPX or SXR8

Very important point is that the dollar is way too strog now and it needs to go down if the US wants strong economy again.

Thank you guys for you opinion!

 

[crfstewarje]

@peterson1111 Could you explain how EUR hedged etf-s work?

 

[peterson1111]

@crfstewarje Here is pretty much explaind. Let me know what you think

https://blog.stockspot.com.au/hedged-vs-unhedged-etf/

 

[peterson1111]

@kcnalp As I live in Croatia, if I hold IUSE more then two years, for all capital gains I do not have to pay taxes. This is big plus.

Which means in two years I could sell all IUSE and buy SXR8.