Multi Currency Portfolio Update Volatility

by | Sep 23, 2007 | Multi Currency Investing

Multi currency portfolio volatility is seen in the latest review of the five multi currency portfolios we created November 1, 2006 and have tracked since shows how fast portfolios can recover and how quickly the US dollar can fall.


Portfolios 2007 June 28 July 20   Aug 17 Aug 31 Sept 9 Sept 21
Swiss Samba  44.80%  45.84% 15.19% 26.42% 30.86% 38.72%
Emerging Market 54.31% 67.67% 30.50%  58.18% 67.95% 86.04%
Dollar Short   33.81%   40.31% 9.14% 20.29% 23.16%  36.36%
Dollar Neutral   37.64% 38.07% 13.56% 22.33% 24.22% 30.32%
Green    178.28%  214.15% 110.93% 155.84% 170.22% 191.10%


The Emerging Markets Portfolio which lost half its value from July 20 through August 17 has recovered all that loss and has risen and extra 19.37% to boot. That’s a 27% increase from the July 20 value and a whopping 182% rebound from its August 17 low.   This rebound has been funded mainly by strong returns in Chinese and Turkish equities.


The dollar neutral portfolio has jumped almost as much, up 167.60% from the August 17 depression. However it is the dollar short that is truly phenomenal, up 297% in just a month.


The Green Portfolio looks impressive.  Given a bit of low interest rate boost in the equity markets this portfolio could end the year with a 200%+ gain. However its recovery was not as strong as the other portfolios (though neither was its drop).


Yet most of this movement is meaningless…just noise.  No reliable indicators could have predicted the exact moment of the drop or the timing of the rebound.  Here is what really counts.


Staying power is first and foremost important…financially and emotionally.  Our long term strategy would have kept us in the market though this sudden and short correction because though returns in equity markets have been phenomenal in the past four years there is a reason.  High GDP growth and falling interest rates have stimulated markets.  Earnings growth has explained more than 100% of the global equity returns in this past bull market.


P/E multiples globally are still low and this leaves the equity markets room for further growth. Equities are not expensive.


Emerging markets continue to catch up with major markets and the US dollar continues to fall.


We expect moderately higher stock markets at the end of 2007 and believe that the 2007 market correction is complete.


Of course this service is for educational purposes so we track the portfolios for a year regardless of their results.


This means that we are now working on developing the 2008 portfolios.


While Thomas Fischer was with us in North Carolina this month, we developed a short list of seven (we’ll end up with five) for the next year.


Health Portfolio

Green Portfolio (again but revitalized)

Infrastructure Portfolio

Dollar Short Portfolio

Water Portfolio

Emerging Market Portfolio

Biotech Portfolio


We will now be looking for securities that fit in these categories to see if we can match up a portfolio that consists of shares that are:


#1: Inexpensive.  Cheap stocks outperform expensive stocks.


#2: Earning more.  Stocks in companies with rising earnings outperform stocks in companies with falling earnings.


#3: Rising.  Companies with share prices already in established up trends outperform the market.


In short we’ll look to see if we can find enough cheap, high quality stocks with high and rising earnings and increasing attention in the market now.


If we find enough value in a desired sector then we’ll run this through Jyske Bank’s safety system. For example, we need at least 3 different sectors represented in a leverage currency sandwich. This protects against really sudden drops from a sector problem.   So we cannot make a pure Biotech play that is leveraged. 


I have suggested to Jyske that we build one portfolio this year without leverage.


We can expect 7% to 10% annual return in the stock market as a function of global nominal GDP growth.  To attain higher growth we must either increase risk or trust luck.   Leveraged multi currency portfolios (we call Multi Currency Sandwiches) increase risk.  If you leverage one time at 4% interest as an example (invest $100,000 and borrow $100,000 for example) a 10% return grows to 16%.  A two times loan (invest $100,000 and borrow $200,000) increases return to 22% per annum.


Yet if the market heads south, losses mount much faster as well.  A look at the volatility of the ten portfolios we have created and tracked these last two years shows how performance can be enhanced but how leverage increases risk as well.


Look at the rise, fall and rise in the 2006 portfolios that started October 21, 2005. They all rose very nicely until early March when the second worst emerging market correction began.  Then the leverage in these portfolios magnified the market corrections. When emerging markets rebounded, the leverage once again helped stimulate the recovery.


2006 Portfolios  March 5 July 6 Aug 10 Sept 12 Nov. 18
US Dollar Long 11.60% – 6.4%  -1.27%  8.81% 9.04%
US Dollar Short 7.22% -3.90% 0.16% 7.32% 10.43%
US Dollar Hedge 9.93%  -4.54% 0.79% 10.60% 11.46%
Emerging Market 61.03% 4.68%  34.37% 34.13% 42.93%
Asia Emerging Marke 76.45 30.02% 68.90% 91.40% 114.16%



Look again at the July 20 to August 31 performance of this year to see how leverage adds rises and drops.


Portfolios 2007 July 20 Aug 17 Aug 31 Sept 9 Sept 21
Swiss Samba   45.84% 15.19% 26.42% 30.86% 38.72%
Emerging Market  67.67% 30.50% 58.18% 67.95% 86.04%
Dollar Short 40.31%  9.14% 20.29% 23.16% 36.36%
Dollar Neutral  38.07% 13.56% 22.33% 24.22% 30.32%
Green      214.15% 110.93% 155.84% 170.22% 191.10%


I am receiving notes from readers making statements like, “ Gary I just want a no risk portfolio and am happy to accept a lower 20% per annum.”


Such comments help me realize that some readers are ignoring the warnings about leverage.  Do not do this!  Do not invest more than you can afford to lose. We have been in a phenomenal bull market. Periods of high returns are generally followed by periods of lower returns.


Our recent research suggests we may have 9 to 12 months more of upwards movement. However the corrections over the past two years show the concern in the market.  One should invest for the long term and create a portfolio that fits our liquidity needs for the long term.


Readers are especially asking me about investing in gold and even leveraging gold and silver.


Here for example is the type of note I am receiving:


“ Gary , I am a 64 year old divorced woman who unfortunately invested all her money (sale of a house and my IRA money into choices that were financially disastrous).  Part went into investments partly in England where due to fraud the money was frozen in the courts.  The rest was sent to a person who never even had the small tech company he purported to have.  The receiverships say there is no hope for getting money back. 


“I own a house in foreclosure.  I basically live off my $473 social security check and a $100.79.


“I have $300,000 U.S. dollars equivalent in euros and do not want to lose it.   My contact at Jyske Bank says that what you do is too risky.  I said that I need to not to lose my principle.  Yet, I would love to be involved with what you purport if I don’t lose the last of what I have in the Foundation.  Your numbers always look good on your emails to us.  Yet, my advisor says it is too risky. 


“I wanted to buy gold and she suggested buying Jyske stock…I went along with her advice and now I wish I had not.  Gold has gone up and Jyske has gone down.   My experience is that sometimes one can be too ‘cautious’ and actually lose money.  Like the Jyske investment instead of gold.


“I feel that I want it both ways…I don’t want to lose my principle amount and yet I want to make money on it.  Yet my advisor thinks what you do is out of the question.  Yet, it appeals to me.  So, what do you suggest?  Answer in terms if I were your sister or something along those lines.”


I replied:  “As a publisher I cannot give individual investment advice.  However your Jyske advisor is correct that leveraging an investment increases risk. Trying to have it both ways with no risk and more profit appears to have been at the root of your previous problems.  Investors cannot have it both ways.  In today’s environment anything over a 7 to 10% per annum return comes with increased risk.  Also I sold all my gold and bought Jyske shares. Gold has risen about double in the past five years. Jyske shares are up nearly 5 times long term.  Regards, Gary ”


Her response was as I expected:  “My financial demise was due to unethical people— not trying to have it both ways.  It is NOW that I would like to maintain the principle.  Guess timing is everything.  I will not consider what you are doing.   It looks good on your emails.  The time will come when gold will look better than Jyske…Good luck to you,  I must remember you as a ‘publisher’ rather than an investor…Similar to the Sovereign Society emails and International Living.”


Here is the problem with this response.  First that reader lost money because the unethical people offered her high profits that were not realistic and she bought the story.  The reality which has been proven again and again is that extra profit comes from taking extra risk.  Timing is not everything. Value is everything. There is no reliable way for the average investor to know when markets are going to rise and to fall in the short term.


The reader is correct that Jyske shares are down in the short term.  This is why I am considering buying more Jyske shares for the long term because I believe the value has been improved by the short term correction.


This is also why I am not buying gold now.  Gold is meant to be an insurance policy against super inflation. 100 years of investment history shows that equities in general outperform gold and silver except in times of hyper inflation.


To hold a small percent of your portfolio in precious metals makes sense. To speculate on a price rise at any time is just that…speculation. Leveraged speculation is the riskiest investment of all.   This may be good for some investors but for a 64 year old widow without financial back ground?  No!!!


Please excuse my soap box performance this morning, but I am concerned. The performance of our five multi currency portfolios has been outstanding.  I along with Thomas Fischer will always work hard to create interesting portfolios we can study and track. We hope to see another repeat performance of high returns. Yet do not count on this. Anything over 7 to 10% per annum is due to increased risk and a bit of luck.  Do not invest more than you can afford to lose!

See attached file.