A reader recently sent me this note.
Dear Gary, I have been following your articles and various portfolios relating to the Multicurrency Sandwich and Jyske Bank’s Loan Invest Program. I find the subject very interesting and something that one cannot find in the U.S. banks.
I am preparing to set up a program through Jyske Bank. Looking at your Borrow Low sample portfolios I see they are selected by regions of the world and whether to be dollar long or short. I am in my mid-60’s and would like a portfolio oriented toward retirement income that throws off income on a monthly or quarterly basis and still has a growth component. Initial selections have included a Turkey bond, Icelandic currency account, Mexican bonos bond, and Jyske Chinese, Indian, and Eastern European equity funds. Concerning the loan part, I have been advised to use the Euro, CZK, JPY and CHF. My initial investment amount is $50,000 with additional gearing of $77,500 for a total investment amount of $127,500. I would appreciate your thoughts on this and any suggestions. I would think that there would be quite an interest in such a portfolio that could provide monthly/quarterly income for the “Baby Boomers” and “Pre-Boomers” (in my case). Thank you for your insights and interesting articles. Best regards.
I had to send this reply to the reader.
We are saddened by recent events in this country that threatens the freedom of the press and makes it impossible for me to answer your personal request.
One of our fellow publishers was recently attacked by the Securities Exchange Commission (SEC) and eventually settled for millions of dollars though there was no admission of nor conviction of wrong doing. This publishing firm has been recognized as a highly reputable firm for 35 years and I suspect will continue to be.
The issue was simply whether the publisher was an investment publisher or an investment advisor. The SEC claimed that aspects of this publisher’s business gave advice.
This is not the first attempt by the SEC to regulate the financial press. I believe they would very much like to call all publishers advisors and place us under their control. This would allow them to regulate and restrict what we could write.
This recent attack on another publisher was highly unfortunate but at least clarified some of the lines that distinguish a publisher from an advisor. Two distinguishing factors that emerged are:
#1: One size fits all vs. customized. An investment newsletter publisher sends out the same information to all subscribers to a particular publication. In contrast an investment advisor provides customized recommendations that fit the individual goals and circumstances of individuals.
#2: Reader or Client. An investment newsletter publisher like an author has no information about the individual financial circumstances of its readers. In contrast, an investment advisor must have individual information.
We are sensitive to this issue and feel that maintaining our role as publishers and our freedom to write what we wish without interference from the SEC is the best way to serve our readers. Thus we cannot have personal discussions about our reader’s finances and cannot give specific individual advice.
We can in some instances give answers to general questions in a general form that is sent to all our readers in our daily email.
I regret that society has come to the state where government dictates how well informed adults can communicate, but the aggressiveness of the government in this matter is something we cannot ignore. Regards, Gary
I cannot answer that person directly. However we can at the general question and come up with some answers that may benefit all of you.
First, when thinking about one’s finances, most investors ask the most important question about their wealth. They never question “How much do I have to invest?” versus “How much do I need to spend?”. Answers to these questions help answer a vital question, “How much can I afford to lose?”
Then an investor has to ask “How emotionally capable am I of losing?” Leverage enhances potential profit and potential loss.
Generally, when thinking of retirement, one should be aware that retirement portfolios are not always capable of recouping losses so easily. The entire earning power of the portfolio may be needed to create income. Plus retirement portfolios do not have the advantage of time. The vital long term building aspect of the investments are gone. The impact of a loss may be more significant than with a younger person who can afford to let profits grow.
Yes, a MultiCurrency sandwich can help when everything is good.
Take a portfolio of:
Turkey bond $30K yielding 19%
Mexican bond $30K yielding 9%
Icelandic CD $30K yielding 10%
China mutual fund $10K growth 7%
India mutual fund $10K growth 7%
Eastern Europe Mutual Fund $12K growth 7%
Borrowed $25K Czech koruna @3.75%
Borrowed $25K Swiss franc @2.50%
Borrowed $22K Japanese yen @2.00%
Assuming that these projections actually come true, in a year, this portfolio earns about $12,000 on the $50,000. This is a very nice return in the 24% range from the actual investment. The extra earnings are created because of the leverage.
This is a pretty nice concept, well diversified, without 65% of the portfolio in bonds generating excellent income, while the equities provide capital growth. The investor can take $9,000 income (18% of the invested amount) and leave $3,000 of growth in the portfolio to protect future earning power.
However, we must always remember that these are only projections! Diversification also increases the risk of volatility. History suggests that in the long term emerging markets bring greater profits, but with more portfolio fluctuation. For example, last year there was an emerging market meltdown. In this example, which is supported by reality, for six months the portfolio above would have suffered.
Investors need to look at these risks. Take a scenario where the Turkish lira drops 20%, the Icelandic kroner drops 10%, the Mexican peso drops 3% versus the US dollar. Plus assume that China , India and Eastern European fund are down 7% for a year.
In this losing scenario, after a year, the portf olio would have dropped from $50,000 to about $46,000 (an 8% drop) and would produce no income. During the year the portfolio would be down even more.
The investor must ask, “Can I afford this risk?” He must also ask if he can afford to stop drawing income from the portfolio during a down time.
The best one can say from the data given by the reader is that emerging markets offer higher income and growth but also bring higher volatility. Leverage enhances growth but magnifies volatility.
Also note in Keppler’s last top value ratings that India now has a SELL ranking and China has just been downgraded from the top value list to NEUTRAL. On the other hand Poland has been upgraded to BUY which would help support the Eastern European market. See International Investments – October 2006 Emerging Market Value Analysis
There is little doubt that India , China and Eastern Europe equities offer great long term potential, but these value ratings suggest that at least one of the markets chosen may be a bit ahead of its true fundamentals at this time. They have raced ahead because of their great potential but may be ready for some corrections.
This reader must ask whether his retirement income can stand an extended wait while a market catches up.
A portfolio of US dollar denominated bonds would produce 5% per annum in a pretty regular way. The volatility is gone, but the income is much lower and there is little protection against inflation.
Economic history of the last 40 years suggests that this Multicurrency portfolio makes sense if its part of an overall balanced plan that is in harmony with the investor’s total situation.
Anyone using this type of investment must honestly ask what impact losses will create. Does the investor have other income? Can they afford to live with the loss? Can they delay drawing on this portfolio? The key to investing with leverage is to never invest more than one can afford to lose!
Overall, if the investor can afford the volatility, this is a good plan of diversification. The emerging markets add growth potential and increased income. The leverage magnifies this potential.
The note from this reader, however, points out the huge problem of investing in a vacuum. Financial planners too often ignore all the key questions of life. Investors all too often accept this ignorance. Don ’t do this!
When looking at your investment plans, start with what you wish to do, how much you need and how much you have to invest.
Looking at the numbers, without reviewing the overall circumstances, is like asking a medical doctor about health problems without outlining what one eats, how much exercise one takes and how well one sleeps. “Hey doc, my leg hurts. How do I fix it?” This, too, unfortunately happens, but those of us who take the Bird’s Eye View can see the value of global of investing from greater growth and stability.
P.S. Learn how to borrow low-deposit high. Leverage investments in top value markets like Turkey , China , India and more. See how our Asian model portfolio returned 98% in the last 11 months. See Borrow Low – Deposit High
Even better, join Merri, Jyske Bank and me at our upcoming November International Business and Investing Course in Ecuador . Learn how to diversify globally. See International Business Made EZ – Ecuador
Until next message, I hope your investing brings you what you need.
P.S. Here is a photo taken at our recent Super Thinking + Spanish Course in Ecuador . Delegates visited many markets including this animal fair. There is a lesson here that investors may want to remember, “Bulls always win sometimes. Bears always win sometimes, but hogs get slaughtered.
Learn more about learning at Super Thinking + Super Memory + Spanish