Investment Timing and Account Allocations?

[fools_gold]

You cannot make generalizations about currency risk, but must look at it in terms of specific currency pairs.

A 50 year timeframe is not short when it comes to back-testing. Policies come and go. There are always periods of volatility. Passive investors are not too worried by this.

I was a bit confused when you said before that the average volatility was 1-2%. You can see just by looking at the chart it's clearly much more than that.

I had just assumed you were just talking about the past few years, but what I think what you've actually done is taken an average of the yearly change over the past 50 years. That would give -1.29%. Is that right?

The problem is that this calculation gives the average yearly return, not the volatility. They are not the same thing. You'd need to work out the standard deviation to get the volatility, and Excel informs me that it is 11.52%. And that's just the average. Some years have seen +/- 25%.

Also, I don't think there is anything particularly stable about the USD/JPY pair. I also calculated GBP vs USD for the past 50 years and I got a similar volatility (11%). As I said, currency risk is something to consider for all people investing internationally.

This volatility is not good because it does not add to your returns. We can expect to be adequately compensated for the risk taken when investing in stocks. However, we can't reasonable expect currency returns to be positive and it is therefore uncompensated risk. That's not good.

I know the options in Japan may not seem particularly attractive, but it doesn't mean currency risk can be ignored or wished away.

Because your gains through positive currency risk are balancing out your reduced buying power.

I think you're looking through the rearview mirror here.

Yes, historically the volatility averages out to be quite low. I would be buying 20 years myself though.

As I've illustrated, the volatility is over 11%. You can't reasonably expect the total returns of a US bond to be the same in Japanese yen as USD even after 10 or 20 years.

Like I said before, what you are saying about currency risk seems to be at odds with standard investing practice. You may well be right, but it'd be nice for you to provide some reputable sources and data for us all to look over.

[EmaxisSlim Cultist]

I was a bit confused when you said before that the average volatility was 1-2%. You can see just by looking at the chart it's clearly much more than that.

It seems we agree with the data, but have different conclusions. When in the accumulating phases either the hedged, or unhedged products reduce volatility, but definitely to different degrees.

A retiree may indeed be more interested in hedged products, or a balanced approach between hedged/unhedged.

However, I still do not see why anyone would by JGB when term deposits offer higher yield. That seems nonsensical to me.

I think you're looking through the rearview mirror here.

That`s all we can do. The data suggests for a non-retiree the risk of unhedged products is minimal. Risk is not black and white.

Between the 100% VTI/VT portfolio and the 60/40 VTI/VT - BND/BNDW there are many different risk allocations.

As I've illustrated, the volatility is over 11%. You can't reasonably expect the total returns of a US bond to be the same in Japanese yen as USD even after 10 or 20 years.

Like I said before, what you are saying about currency risk seems to be at odds with standard investing practice. You may well be right, but it'd be nice for you to provide some reputable sources and data for us all to look over.

I am sure we can both find lots of sell side research! There companies happily sell both products. However, I think it is a question that is as persona as bond/stock allocation, but perhaps of lesser importance.

How scared is an investor when it comes to volatility? Anyone holding JGBs in this environment could be said to be extremely conservative and risk adverse.

With 30+ Years to retirement the implied volatility of unhedged-developed country bonds is simply not a worry to me.

The logical approach would be to consider hedged products as I approach retirement and value lower yearly volatility.