Simple Question

[PattayaMale]

Ok, I understand that most on this Board are much smarter than I am when it comes to international finances. So please keep your answer simple if you can.

 

S&P downgrades the USA credit rating. Interest rates are suppose to go up. So doesn't Wall Street banks win again? Who gets the extra money in interest?

[Guest]

S&P downgrades the USA credit rating. Interest rates are suppose to go up. So doesn't Wall Street banks win again? Who gets the extra money in interest?

 

Anyone who buys US government bonds will pay more to cover the increased risk of default. You could buy them, the banks could buy them, insurance companies or even the Chinese government.

Only a couple of years ago, anyone dumb enough to buy Greek government bonds received a higher rate of interest to compensate for the increased risk.

 

Frankly speaking, any person, company or government which borrows irresponsibly deserves the consequences.

[Bob]

Presuming the interest on T-bills goes up, who'll mainly get the additional interest are the Chinese, Japanese, etc. (whoever continues to buy them).

 

Within the US, it's likely a somewhat zero-sum game (other than the eternal axiom that the consumer always gets screwed). If general interest rates rise, it's likely the money the banks borrow will also carry a higher rate of interest.

 

The day US bonds become worthless will be the same day that the entire world's finances swirl down the porcelain receptacle (i.e., it ain't gonna happen).

[Guest]

The day US bonds become worthless will be the same day that the entire world's finances swirl down the porcelain receptacle (i.e., it ain't gonna happen).

 

Maybe not worthless, but a large percentage of the value may well be lost if the US carries on with its long term irresponsible borrowing. This loss of value may well be in the form of inflation and poorer exchange rates.

[Gaybutton]

An old catch phrase I never hear anymore:

 

"Sound as a dollar."

 

Maybe that phrase still applies to other countries where the monetary unit is called 'dollar,' but I doubt many would think it applies to the American dollar anymore.

[Guest fountainhall]

Can I expand the subject a little? In the present financial climate as of this morning with stock markets tanking yet again, where do you put your hard-earned savings if you are looking at, say, a 3-year timeline?

 

Cash? In which currency or basket of currencies? Another poster on this Board some months ago suggested bonds issued by Australian banks, but the Ozzie $ has now lost over 5% of its value in just a few weeks. Same with the Canadian $. The Yen and the Swiss franc, on the other hand, have risen so steeply, is there value left there? Over 3 years, won’t they come down?

 

Other major Asian currencies seem to be holding steady. Do you go with gut instinct and buy the Chinese RMB (if you can get hold of it) reckoning that it almost has to rise in the longer term - inflation and the slowing of the economy notwithstanding?

 

Stocks? With prices now much lower, is it time to dip in and buy? If so, which markets and what types of stocks? Are any still paying out decent dividends which will not be wiped out by declining currencies?

 

One sector which has risen sharply in the last 15 months is Asian gaming stocks - Wynn Macau, Sands China and most recently MGM China. They're now taking a tumble along with all the others, but the Chinese will never stop gambling and not only do Macau revenues just keep going through the roof, Sands Singapore seems to be a cash cow, plus there is the soon-to-come expansion of the existing companies into markets like Taiwan and Vietnam to consider. Tiny Macau now generates four times - yup, that's FOUR times - the revenues of the Strip in Las Vegas. In the last year alone, revenues were up 42%, and it is reckoned that by the end of this year, Macau will be generating five times The Strip's revenues! Worth considering?

 

Gold? At record levels yet again, can it really go higher - and stay there over the long term?

 

I have been burned so often in the various crises that have hit Asia and the world in the last 14-odd years that I don’t know where to turn. Professional Financial Advisers? Lost me so much over the years, I don’t trust any of them.

[Bob]

Can I expand the subject a little? In the present financial climate as of this morning with stock markets tanking yet again, where do you put your hard-earned savings if you are looking at, say, a 3-year timeline?

 

Your timeline directs the only answer - cash and cash equivalents (cd's, T-bills, and the like). Most experts I've read suggest that for anything under a 5-year timeline.

 

You live in Thailand (or at least I think you do) and, given you're talking about such a short timeline, why not consider a couple years worth of cash in a Thai savings account. That would protect you against currency fluctuations and you could earn more interest there than accounts back in the US or UK. Just a thought (and worth what you're paying for it?).

[Guest]

Professional Financial Advisers? Lost me so much over the years, I don’t trust any of them.

 

I'm buying shares at the moment. "Be greedy when others are fearful and fearful when others are greedy" (Buffet). I think a good strategy is to build up a diversified global portfolio of equities, preferably purchasing at low PE ratios. "Financial advisers" are in it for themselves, so anyone who is keen to invest should start reading,. There are plenty of books around by or about the likes of Peter Lynch, Anthony Bolton, Warren Buffet & John Templeton etc.

 

Those who don't want to spend time on this can put their money in LOW COST index funds or managed funds, where there is good evidence to show the manager earns his or her fees over the long term (e.g. LSE:SST).

Ideally, in this passive scenario, you would make regular monthly contributions to reduce the risk of bad timing.

 

Of course, an index fund investing in the US or UK leaves an awful lot of currency risk for anyone planning to retire in Thailand, so best to include some Asian investments. Buying some SST every month is not a bad idea, although perhaps there may be better funds listed in Asia or the US.

 

--------------------------------------------

Of course my comments are about "investment" strategy. That allows anyone working in Europe or North America the possibility of an early retirement to Asia.

 

Of course a couple of our key contributors seem to manage working in Asia, or running businesses from there at an earlier stage in life. That seems like a much more satisfactory option for those with enough nous & ambition or even luck to make this happen. Perhaps that's a subject for another thread, if anyone has anything to say.

[Guest fountainhall]

Your timeline directs the only answer - cash and cash equivalents (cd's, T-bills, and the like). Most experts I've read suggest that for anything under a 5-year timeline.

Thanks Bob. I already have almost 2 years cash in Thailand and may transfer over a bit more.

 

As for the rest of the cash, in what currency/currencies to you hold cash now? I have US$, sterling and a smallish amount of Chinese RMB. I'll switch more $s to RMB over time, as I just do not believe the government will permit a hard landing, plus external pressures to revalue upwards are unlikely to weaken. I'd like another 'safe' currency to spread the risk, but the

[Bob]

As for the rest of the cash, in what currency/currencies to you hold cash now? I have US$, sterling and a smallish amount of Chinese RMB.

 

Everybody's situation is different and dependent on one's age, need to take risks, and risk tolerance. For various reasons (mainly no personal need to take risks and the likelihood that my retirement would become more "nervous" should I lose 20-30% of investment value), I am about 90% in cash and cash equivalents in only the US and Thailand. The money I have in Thailand is there to protect me against currency fluctuations and, frankly, is doing much better interest-wise than the funds in the US.

 

I have nothing against equities - in fact I retired largely because of success there over the years - but I'm absolutely negative on the US and Europe for the long-term (I personally believe we will never see in our lifetimes the good economic and investment times we saw during our working lives). But I have no need to take any significant risks and doing so could affect my lifestyle. And that's a risk I'm currently not willing to take.

 

But I've wanted to invest in Chinese currency for years. I used to hold funds which were heavily invested in the Chinese economy and did rather well; however, I've not directly played the Chinese currency game and would love to hear any suggestions you might have to do that safely ("safely" for me means my money is in a fund controlled outside of China, i.e., I'm not going to attempt to open and stuff money into a Chinese bank account).

[Guest]

Cash is not risk free. If interest rates are below the inflation rate, cash loses value.

Quite a few countries have inflation issues or a risk of an imminent problem.

 

Currently it seems possible to purchase selected equities at attractive valuations which to me seem like a better long term bet than cash.

[Bob]

Cash is not risk free. If interest rates are below the inflation rate, cash loses value.

Quite a few countries have inflation issues or a risk of an imminent problem.

 

Currently it seems possible to purchase selected equities at attractive valuations which to me seem like a better long term bet than cash.

 

Nothing is technically risk free. But inflation has not been much of an issue in the US for some time now (and, given all the deflation talk by analysts these days, not likely to be a problem for the next year or two).

 

Condolences to the equity holders the last week or so. Rather ugly out there at the moment.

[Guest fountainhall]

I've wanted to invest in Chinese currency for years. I used to hold funds which were heavily invested in the Chinese economy and did rather well; however, I've not directly played the Chinese currency game and would love to hear any suggestions you might have to do that safely ("safely" for me means my money is in a fund controlled outside of China, i.e., I'm not going to attempt to open and stuff money into a Chinese bank account).

Even if you tried, I don't think you could open a Chinese bank account! And in Hong Kong, the only people permitted to purchase more than a tourist amount of the Chinese currency and RMB-denominated bonds are holders of Hong Kong Permanent ID cards (unless you are doing a business transaction and have reams of paperwork).

 

What you can do is invest in what are called 'H' shares. These are shares issued by mainland companies but listed on the Hong Kong Stock Exchange and subject to the rules of the Exchange.

 

H-shares are available for more than 90 Chinese companies, giving investors at least some access to most of the major economic sectors such as financials, industrials and utilities. In 2007, the Chinese government decided to allow mainland investors to invest in the Hong Kong exchange, which greatly increased the demand for H-shares, as mainland investors were previously forbidden from investing in the exchange. China still offers A-shares in many of the same companies, but only mainland residents can invest in them.

http://www.investopedia.com/terms/h/hshares.asp

 

And of course some mainland companies are also listed in New York. Additionally, there are mutual funds that trade either exclusively in mainland shares, or in Greater China - mainland China, Hong Kong and Taiwan. These are controlled wholly outside China, but inevitably the stocks in the portfolio are subject to the same risks as any stocks.

 

The main problem with direct stock investment for the wary investor is the lack of strict oversight within China. I'm told it's best to stick to well established companies or diversified mutual funds.

[Guest]

The media makes this massive fuss, when the FTSE is merely back down to the level it was at 1 year ago. That makes it the best buying opportunity within the last 12 months.

 

Anyone who's going to seriously invest in equities shouldn't be losing a single second of sleep over this minor blip.

 

As for investing in China, well don't forget the rest of Asia also. There are many economies with high growth rates and lower levels of debt (than the "developed" countries).

And it gives the right kind of currency footprint for anyone who wants to retire to the region (full or part time).

[Guest anonone]

I have to agree that equities still have a place in the portfolio, especially for those of us that have a long time to wait until retirement.

 

With recent history and impact of globalization, the market will be more volatile. I think this will be true for some time. But it is also the place with the best opportunity to really grow investments. I am a bit heavier on international equities now, including Asian. Still have some US, but less than before.

[Guest]

I have to agree that equities still have a place in the portfolio, especially for those of us that have a long time to wait until retirement.

 

They could have a place for people who hope to wait a long time between retirement and death.

Compare 20 years of 5% inflation and 3% interest, with 20 years of 5% dividends, which may increase in line with inflation.

 

The former gives you certainty of loss of capital and loss of income (in real terms). -64% if you live off the dividends.

The latter option may preserve your capital and income. Nothing is certain, but historically equities purchased sensibly will outperform bank investments over periods of 20 years.

[Guest fountainhall]

I suppose the main question for those of use who are much closer to retirement is not when to get into the market, but when to get out. Given a shorter time frame, how much would you be prepared to lose on a stock investment before you sell and write off a loss?

[Guest]

Unless you are compelled to by legislation, I'm not sure it's necessary to get out of equities before retiring.

 

If a UK male retires at 60, takes all his fund out of equities and buys an annuity, he would get something like 6.1%, not inflation indexed. After 20 years of 5% inflation, the value of this income has dropped by 64%.

 

If he keeps his money in equities, the initial dividend income could be 5% and it should more or less keep up with inflation. In fact, the historical long term total rate of return on equities is near 9%.

 

So he's swapped the certain poverty of an annuity for a risky equity investment that will probably deliver a greater income.

 

All of the theories on moving into cash before retirement seem to be based on historical short life expectancies & ignoring inflation risk.

 

Of course in the UK, most people are compelled to trade their pension funds in for an annuity before they reach 75.

 

The current UK "ISA" account is a very good way of building up an equity portfolio for retirement, certainly for any spare income that's not taxed at the higher rate tax threshold. Then he can take a dividend income tax free, after retirement.

 

Of course, if you are retiring at the top of an obvious stockmarket bubble, cash might look like a better idea.

[Guest fountainhall]

Unless you are compelled to by legislation, I'm not sure it's necessary to get out of equities before retiring.

Sorry, I didn't make myself clear enough. I was not linking the question to retiring - but for someone who is around 60 and wants some funds in equities. Getting in when the market falls is relatively much easier than knowing when to get out when the market falls. For example, as I mentioned earlier, I was dumb enough to but a few shares in Citibank after the price had tanked around 60%. As it kept falling, I'd buy a few more to average out the cost. That's perhaps a lousy example because it just continued to fall - down to just under US$1 at one point.

 

I sometimes hear analysts and commentators on the financial channels say that unless you are in the market for a very long term and can not tie up the capital for that length of time, you need a stop-loss order so you don't lose more than, say 20% on any one stock. Citibank has been a disaster for its longer term investors, worth now around 6% of what it was 5 years ago, and its once attractive dividend reduced to a few cents.

 

Another example. Warren Buffet bought into a Chinese car and battery maker BYD about 3 years ago. He bought at around US$1 and owns about 10$ of the company. WIth the boom in China stocks that was starting around that time, the shares gradually reached around $8 and he said it was his best ever investment. Then the share started to drop at the start of this year. I bought a few at around $3.70 and it continued to go down. Buffet bought more at around $2.60 or so. But the stock has slumbered around that level. In this case, I'm happy to back Buffet's experience, even though I am now under the notional 20% loss figure.

 

More generally, though. WIth a small stock portfolio and a fixed time horizon, should you just be ruthless, bite the bullet and sell when you get to a 20% or other loss? I can remember the 1970s when much of the UK market was in the doldrums for almost the entire decade. WIth the present volatility, austerity measures being adopted by many countries, and growth rates slashed, is stock investment therefore too risky - bearing in mind that 5-year horizon?

[Guest]

I'm not at all sure about BYD.

 

Historically, countries like the US and UK started off with many car manufacturers and over the decades that number was whittled down to a few survivors. China has many car manufacturers and I'm not smart enough to figure out which will survive. Having said that, if BYD is priced low enough to give a good risk/reward ratio, why not invest in it? The Chinese car market has grown quickly and may continue to grow over the medium term.

 

As for the idea of selling when a stock falls by 20%, well if it's just fallen mainly due to a market correction and the underlying business is still good, I prefer to buy more.

Of course if the business has made a strategic error, or if there is some tangible news, or all the directors are selling, then I would be inclined to take the 20% loss and run.

 

There are also some good books on investing out there, such as "The Great Investors" by Glen Arnold and "The Most Important Thing" by Howard Marks.

[Guest fountainhall]

Thanks z909. It's clearly time I read one of those books.