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lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 2:31 am
by SanMiguel
I haven't done the stats on this but would I be right in thinking that the lowest asset performer in the PP is the tbills/cash part?
Has anyone experimented with using a 25% allocation to a carry trade currency instead. For example, this used to be anything against the yen but now is pretty much any currency against the aussie dollar gaining 5% form the interest alone not including capital appreciation.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 2:42 am
by AdamA
The point of the T-bills is not yield, it's security. Any cash investment that involves foreign currency adds currency risk and therefore not appropriate for the cash portion of your PP.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 3:33 am
by SanMiguel
Adam1226 wrote:
The point of the T-bills is not yield, it's security. Any cash investment that involves foreign currency adds currency risk and therefore not appropriate for the cash portion of your PP.
Since the aussie dollar is linked to gold, wouldn't investing in the aussie dollar have been better than the gold portion recently?
A carry trade has yield...
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 11:41 am
by HB Reader
SanMiguel wrote:
Since the aussie dollar is linked to gold, wouldn't investing in the aussie dollar have been better than the gold portion recently?
A carry trade has yield...
The aussie dollar isn't backed or linked in any reliable way with gold. No national currency is, even the Swiss franc.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 12:47 pm
by MediumTex
HB Reader wrote:
SanMiguel wrote:
Since the aussie dollar is linked to gold, wouldn't investing in the aussie dollar have been better than the gold portion recently?
A carry trade has yield...
The aussie dollar isn't backed or linked in any reliable way with gold. No national currency is, even the Swiss franc.
...and in 2008 would have been a complete disaster in the PP.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 1:29 pm
by SanMiguel
MediumTex wrote:
HB Reader wrote:
SanMiguel wrote:
Since the aussie dollar is linked to gold, wouldn't investing in the aussie dollar have been better than the gold portion recently?
A carry trade has yield...
The aussie dollar isn't backed or linked in any reliable way with gold. No national currency is, even the Swiss franc.
...and in 2008 would have been a complete disaster in the PP.
same as gold or everything?
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 1:53 pm
by MediumTex
SanMiguel wrote:
MediumTex wrote:
HB Reader wrote:
The aussie dollar isn't backed or linked in any reliable way with gold. No national currency is, even the Swiss franc.
...and in 2008 would have been a complete disaster in the PP.
same as gold or everything?
The PP had a small positive return in 2008. While almost every
other strategy saw large losses in 2008, the PP really shined.
If it had held aussie dollars instead of t-bills, 2008 would have been terrible for the PP.
I appreciate your desire to find a way to improve upon the PP, but many of us here have been trying to do this for
years, and have yet to find an effective way of improving upon it without taking on a lot of additional risk and complexity. It's not a strategy that is friendly to tinkering--the normal pattern is to tweak it in some way in order to improve it, and the precise tweak that was made often turns out to increase the overall risk very significantly while providing very little in the way of enhanced returns.
The most popular tweak in recent years has been to shorten the duration of treasury holdings. This approach in 2008 would have been disastrous, since it was only the LT bond exposure that kept the portfolio afloat.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 3:22 pm
by SanMiguel
MediumTex wrote:
SanMiguel wrote:
MediumTex wrote:
...and in 2008 would have been a complete disaster in the PP.
same as gold or everything?
The PP had a small positive return in 2008. While almost every
other strategy saw large losses in 2008, the PP really shined.
If it had held aussie dollars instead of t-bills, 2008 would have been terrible for the PP.
I appreciate your desire to find a way to improve upon the PP, but many of us here have been trying to do this for
years, and have yet to find an effective way of improving upon it without taking on a lot of additional risk and complexity. It's not a strategy that is friendly to tinkering--the normal pattern is to tweak it in some way in order to improve it, and the precise tweak that was made often turns out to increase the overall risk very significantly while providing very little in the way of enhanced returns.
The most popular tweak in recent years has been to shorten the duration of treasury holdings. This approach in 2008 would have been disastrous, since it was only the LT bond exposure that kept the portfolio afloat.
I could be wrong but the aussie dollar wasn't a carry trade in 2008, it was only when the US and others reduced their interest rates to near zero that the aussie became a carry trade...
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 3:40 pm
by MediumTex
SanMiguel wrote:
I could be wrong but the aussie dollar wasn't a carry trade in 2008, it was only when the US and others reduced their interest rates to near zero that the aussie became a carry trade...
Between July and October of 2008, the aussie dollar lost 36% of its value compared to the U.S. dollar.
I wouldn't have wanted that to be 25% of my portfolio.
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 3:58 pm
by SanMiguel
MediumTex wrote:
SanMiguel wrote:
I could be wrong but the aussie dollar wasn't a carry trade in 2008, it was only when the US and others reduced their interest rates to near zero that the aussie became a carry trade...
Between July and October of 2008, the aussie dollar lost 36% of its value compared to the U.S. dollar.
I wouldn't have wanted that to be 25% of my portfolio.
US rates weren't down at 1% until October 2008, that's just about at the point that a currency becomes a contender for a carry trade, I guess that was my point.
Because the interest rate differential between the aussie and the US dollar at that point was above 3%
Re: lowest asset return from PP - use carry trade instead?
Posted: Mon Jun 06, 2011 5:37 pm
by dualstow
Feels good to hold cash these past several days.
Re: lowest asset return from PP - use carry trade instead?
Posted: Tue Jun 07, 2011 4:51 am
by SanMiguel
dualstow wrote:
Feels good to hold cash these past several days.
Feels good to have held a short ETF these past several days
Re: lowest asset return from PP - use carry trade instead?
Posted: Tue Jun 07, 2011 5:20 am
by AdamA
SanMiguel wrote:
Feels good to have held a short ETF these past several days
When are you going to cover?
Re: lowest asset return from PP - use carry trade instead?
Posted: Tue Jun 07, 2011 7:31 am
by SanMiguel
Adam1226 wrote:
SanMiguel wrote:
Feels good to have held a short ETF these past several days
When are you going to cover?
Depends whether the 200 daily MA breaks on the FTSE or not, if it breaks then I will continue to hold short.
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 3:56 am
by SanMiguel
MediumTex wrote:
SanMiguel wrote:
I could be wrong but the aussie dollar wasn't a carry trade in 2008, it was only when the US and others reduced their interest rates to near zero that the aussie became a carry trade...
Between July and October of 2008, the aussie dollar lost 36% of its value compared to the U.S. dollar.
I wouldn't have wanted that to be 25% of my portfolio.
Since October 2008 it has gained about 60% plus the carry differential of around 4%.
For example:
http://www.investopedia.com/articles/fo ... z1OfsMmU6V
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 4:54 am
by AdamA
SanMiguel wrote:
MediumTex wrote:
SanMiguel wrote:
I could be wrong but the aussie dollar wasn't a carry trade in 2008, it was only when the US and others reduced their interest rates to near zero that the aussie became a carry trade...
Between July and October of 2008, the aussie dollar lost 36% of its value compared to the U.S. dollar.
I wouldn't have wanted that to be 25% of my portfolio.
Since October 2008 it has gained about 60% plus the carry differential of around 4%.
For example:
http://www.investopedia.com/articles/fo ... z1OfsMmU6V
Did you know to sell the Aussie in July of 2008? Did you know to buy it back in October?
How about today?
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 6:55 am
by SanMiguel
Adam1226 wrote:
SanMiguel wrote:
MediumTex wrote:
Between July and October of 2008, the aussie dollar lost 36% of its value compared to the U.S. dollar.
I wouldn't have wanted that to be 25% of my portfolio.
Since October 2008 it has gained about 60% plus the carry differential of around 4%.
For example:
http://www.investopedia.com/articles/fo ... z1OfsMmU6V
Did you know to sell the Aussie in July of 2008? Did you know to buy it back in October?
How about today?
That depends on on whether it's classed as a carry trade or not.
The interest rate differentials can be monitored.
I wouldn't buy it right now but as the interest rate differentials increased in Oct 2008, that would have been a buy signal. Right now, the interest rate differentials are still promising, but the aussie has already appreciated lots so it would be like buying the top now.
Yes, I understand you point but that could be said of any of the assets in the portfolio?
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 8:58 am
by MediumTex
SanMiguel wrote:
Yes, I understand you point but that could be said of any of the assets in the portfolio?
No.
We have predefined mechanical buy and sell points for the other assets in the portfolio that don't require any currency and interest rate differential analysis.
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 2:04 pm
by SanMiguel
MediumTex wrote:
SanMiguel wrote:
Yes, I understand you point but that could be said of any of the assets in the portfolio?
No.
We have predefined mechanical buy and sell points for the other assets in the portfolio that don't require any currency and interest rate differential analysis.
Yeah but this is the variable portfolio isn't it? Sorry, I know I have a few threads going, which is confusing.
Re: lowest asset return from PP - use carry trade instead?
Posted: Wed Jun 08, 2011 2:23 pm
by MediumTex
SanMiguel wrote:
MediumTex wrote:
SanMiguel wrote:
Yes, I understand you point but that could be said of any of the assets in the portfolio?
No.
We have predefined mechanical buy and sell points for the other assets in the portfolio that don't require any currency and interest rate differential analysis.
Yeah but this is the variable portfolio isn't it? Sorry, I know I have a few threads going, which is confusing.
If we are talking VP, then anything goes.
I thought we were talking about adding a foreign currency to the PP.
Re: lowest asset return from PP - use carry trade instead?
Posted: Sat Jul 09, 2011 5:24 am
by stone
I actually thought of the Australian Dollar in terms of having a small sacrificial short Australian Dollar allocation to spice up the cash allocation so as to guard against a black swan event where the cash portion was the only positive part of the PP. To my mind the achillies heal of the PP is that the cash 25% does not offer enough of a counter balance when the other three assets tank.
Re: lowest asset return from PP - use carry trade instead?
Posted: Sat Jul 09, 2011 6:11 am
by melveyr
I totally understand that thinking stone. I have not done it, and probably won't do it, but a portfolio of
40% T-Bills
30% T Bonds
20% Stocks
10% Gold
is an allocation that is more weighted with the asset classes historical volatility over time, without going into decimals of the percentages. What is probably going to happen to me naturally is something like.
20% Bank Savings
20% T-Bills
20% T Bonds
20% Stocks
20% Gold
Because it is unlikely that I will have ALL of my assets in the PP, that other money is going to be functioning very similarly to the T-Bills in my bank account. A lot of us "vanilla" PPers are probably actually overweight cash compared to our target allocation when looking at all of our assets.
I am comforted by this, because like you say cash does not pack a punch in the form of a fat capital gains during rising interest rates.