Bond problem - Brazilian investor

[MarkLucas]

Hello everyone!
I'm very thrilled to start investing in the PP, but I live in Brazil and the bond options here are a little weird..
The Brazilian government has some long term bonds (if anyone wants to have a look, here is the link to what they are selling at the moment http://www3.tesouro.gov.br/tesouro_dire ... vosite.asp )
However, I was calculating the historical relations of the bonds available prices to the inflation rate and the results didn't show up as expected..
I found that they don't lose value when inflation rises, they just earn a smaller increase in price during that period (say, for example, 3%)
During periods of decrease in inflation, prices could rise up to 30-35%..
The problem is they only sell 20+ year maturity bonds for bonds that pay interest + inflation ( I think it's TIPS in the USA)..
Check out this data I gathered as an example:

        Inflation NTN-B P
jan/11 5,99 538,2
out/11 6,96 555,13
Price change 3,15%

jan/12 6,21 598,37
set/12 5,28 814,22
Price change            36,07%

Would that be an ok option?

[craigr]

Greetings,

I've been to Brazil and it is a great country with nice people, but I can't say I trust the government that much in terms of the currency. Have you considered diversifying the bonds outside of Brazil? Perhaps an international bond fund could be a better choice.

The Permanent Portfolio is a great idea, but it can only do so much. If the government has a history of bad inflation/currency games it may make sense to diversify more away from the home currency to protect against problems. So something like:

25% - Latin American/World Stocks
25% - World Bonds
25% - Gold Bullion
25% - World short-term bonds

The idea to get some diversification away from the Real in case of problems.

[escafandro]

Good luck with putting together a PP in Latin American countries and our ever-changing policies. I am Argentine and I have already resigned to this idea.
In my case I made a PP having the dollar as a reference. And diversifying in the equity part.

Soo: VTI/VEU-TLT-IAU-SHY.

Maybe you can use EWZ or ILF where exposure to Brazil is preponderant.

The idea of Craig is probably better.
But from my experience I tried a combination with BWZ and SHY as short-term international bonds, but I found that they don´t move in relation to gold as they should, instead tend to follow the movements of the equities. So I leave this allocation.
On the other hand I can think of any way to buy a combination of long-term bonds from different countries in a simple and effective way.

[escafandro]

Given that Brazil tends to run on the higher side of inflation compared to the rest of the world, the international PP is just asking to give yourself a lower real return.  (actually, something close to 0%, and sometimes negative in your case)

Yes. But looking on the bright side, Brazil has been devaluing the real against the dollar these recent times whenever they have thought is necessary. So this type of policy could compensate the lower return, I think.

Do you think that in my case I could be doing better if I change my cash allocation for one year bonds tied to inflation in my currency?

[craigr]

Do you think that in my case I could be doing better if I change my cash allocation for one year bonds tied to inflation in my currency?

In Argentina? No. They are lying about the official numbers as you surely are aware (http://www.economist.com/node/21548242). So your inflation adjustment could be impacted severely.

The main vulnerability with the Permanent Portfolio in some of these places is the portfolio assumes a fairly uncorrupt and stable system. If you don't have that, then all bets are off. IMO. Yes it has protections against very bad events with the gold, but it can't work magic.

Even in Brazil the government has imposed extra taxes on foreign bond purchasers if I recall to curb Real appreciation (http://emergingmoney.com/brazil/real-wa ... bond-buys/). There is no reason to think they couldn't do this with all investors if they felt it was needed.

I'm not saying this to disparage Argentinians or Brazilians as I know you have no control over the policies of the government directly. I'm just posting this as a warning that some diversification outside of areas known to have these problems is a good idea.

[escafandro]

Do you think that in my case I could be doing better if I change my cash allocation for one year bonds tied to inflation in my currency?

In Argentina? No. They are lying about the official numbers as you surely are aware (http://www.economist.com/node/21548242). So your inflation adjustment could be impacted severely.

Sorry for not clarifying. Obviously I would not put a penny in Argentine bonds. But I live in Uruguay where statistics are more reliable. It would be short-term Uruguayan bonds tied to inflation.
What I can not deduce of this change in the Cash part is How it fit having long-term bonds U.S. Treasury and equities in VT.

[escafandro]

You can think of it as two portfolios. 

One: a pure UYU cash deposit.

Two: a no-cash VT-TLT-IAU

Actually I had never thought of this approach to the problem. It's something to meditate deeply.
What kind of percentages that you think could be convenient for the division of portfolios?
50-50
80-20 (as usually divide the equation PP / VP)

[escafandro]

If you're feeling THAT uneasy about your own country, it's probably time to physically move.

Any place in Latin America is nice to live but economically unstable over the history (maybe Chile be the exception). One gets used.
I probably take the approach of 50-50. Fifty percent chance that my currency remains strong, fifty percent chance that devalue against the dollar and recover from that side.
I think it can be sufficiently conservative in the spirit of the PP.