What’s International Diversification All About?
Thank you to all the readers who responded to my recent article, “Diversification, what are you trying to accomplish?” Diversification is a hedge to protect your nest egg from catastrophic risks, including desperate governments and high inflation.
Readers asked for more information about my remark, “How does an investor hedge against inflation? Hold money in different currencies – outside the country if possible.”
How does the average investor go about diversifying out of the US dollar, and safely store some wealth outside the country? What are good currencies to invest in? If you sell dollars and buy currencies that are inflating even faster, you are losing wealth. Readers asked for help.
I contacted a friend and international expert, Rob Vrijhof, President and Senior Partner of Weber Hartmann Vrijhof & Partners Ltd. (WHVP) in Zurich Switzerland. Rob has been involved in international banking since the late 1970’s and is the voice of experience.
DENNIS: Rob, on behalf of our readers, thank you for taking the time for an interview today. In your August edition of The Swiss View, you discussed currency diversification.
Diversified currencies are something international investors regularly factor into their thinking – not only what assets are good investments, but also in what currency do I want to hold the investment to protect my buying power? Most US investors never think beyond US dollars.
Europe, the US, and Japan, in particular, have just gone through years of devaluating their respective currencies. The geopolitical issues around the world are worrisome.
Before we talk individual currencies, what are you telling your clients today? Do you see a high risk and need for diversification?
ROB: Thank you for inviting me. You have touched a very important subject.
As you say, “diversification means different things to different people.” In the 25 years we have been in business, I am still surprised that many investors do not understand the real sense of diversification. We very often talk with interested parties who feel they are indeed very well diversified. They will explain that, yes we hold 50% in treasuries, 30% in stocks in the S&P and Nasdaq and 20% in Gold and Gold stocks at Bank XYZ. This is not what we would consider good diversification.
Investors diversify in order to preserve their wealth. Spreading your wealth among asset classes protects against market fluctuation in your home country. No matter where you live, in today’s world, there are even greater threats to individual wealth.
To help educate our readers, we recently published a paper, “The Crisis-Resistant Swiss Confederation”. Most people don’t realize that one-third of the world’s private wealth resides in Swiss banks.
I’m sure some Americans believe it is because citizens have something to hide, but that is certainly not true for American clients. Foreign banks that want to do business with US clients must comply with the US regulations and there is nothing secret about it.
Investors from all over the world diversify some of their assets to Switzerland for safety. In the last decade, we have seen high inflation wipe out currencies in individual countries, the government in Cyprus and Argentina have frozen accounts and confiscated wealth. How many wars are going on in the world today?
When you look at asset protection you must look at the probability of something bad happening in your own country and the potential damage it could cause. Japan, the US, and the European Union have been living beyond their means for quite some time. They are not exempt from high inflation, which could have catastrophic consequences.
In today’s volatile world, I feel, more than ever before, that people should not hold all their wealth in any single country or currency.
DENNIS: I know you have a lot of American clients who go offshore to diversify out of dollars. What currencies are you recommending today? What do you look for?
ROB: We strongly feel that we could be in for a further period of weakness in the US Dollar. We still favor the Swiss Franc as our safe haven currency and are giving commodity currencies a closer look, especially the Australian Dollar and the Canadian Dollar.
Some of the defensive stocks in the Swiss market still offer a very strong dividend yield of well over 3%. Europe currently looks economically more promising than it did 12 months ago. The Euro was the big surprise of the year, with gains of more than 16% versus the US Dollar since the beginning of 2017. It might have gone unnoticed, but the Swiss Franc gained nearly 50% since the year 2000 versus the US Dollar.
DENNIS: The two most common questions I hear are, “Is it legal to have money in a foreign bank?” -and- “How do I know it is safe?
Rob, the IRS has done a great job of intimidating taxpayers. How do you address their concerns?
ROB: It’s legal for Americans to open a foreign bank account in many jurisdictions, Switzerland is just one of them. Investors can legally open a personal account; trust account or an IRA account offshore.
You now have the possibility to invest in any given currency or any given stock market worldwide – be that Europe, Asia or any other country where there is a stock market.
DENNIS: If investors are looking at offshore money management firms, what should they look for?
ROB: The three major factors I would require would be experience, safety, and compliance.
In Switzerland about 5.6% of the population work in the banking sector, representing 5.12% of our country’s GDP. The long history of Swiss banking has given rise to a class of professional bankers, who, upon completion of university, undergo training in foreign exchange, portfolio management, securities trading and many other disciplines. Worldwide banking is part of the culture and has been for centuries.
Switzerland’s political neutrality continues to the present day. Switzerland has repeatedly rejected membership in the European Union due to concerns that doing so would compromise its neutral status and force it to take sides in international disputes. You want the country you invest in to be as safe as possible.
American investors should require the bank or investment advisor they choose is registered with the SEC in the USA.
A few years back your government instituted some very stringent requirements for offshore banks handling US clients. Many banks and advisors did not want to go through the rigorous steps to garner the appropriate certifications. Some just dumped their US clients. Our firm did the opposite and complied with the US laws in order to better serve our clients.
DENNIS: What advice do you give smaller investors who believe they should diversify out of dollars but don’t feel they have enough to send it offshore?
ROB: I would recommend they don’t assume anything and talk with an offshore specialist. Many firms today are working on programs specifically tailored for smaller investors.
I know your readers have heard of EverBank, which allows investors to buy foreign currency in the US. It helps protect against inflation, some of their investments are FDIC insured, however, all your money is still in the US.
You recently mentioned an online broker that is offering a global trading account. Smaller investors should investigate those options; however, I would be very concerned about their experience.
Diversify your wealth in foreign currencies and locations as best you can. The world is much too volatile to have all your eggs in one basket.
DENNIS: One final question. In your monthly newsletter, you got my attention when you said, “With the current geopolitical tensions worldwide you should hold a certain portion of your total wealth in Gold. This should not be viewed as a trading opportunity, it should be there to stay.”
Can you elaborate on your comments for our readers?
ROB: We believe that up to 15% of your total wealth should be held in Gold Bullion/coins as a nest egg for difficult times.
Japan, the US, and EU are creating trillions of dollars out of thin air. Investors should not ignore the possibility of very high inflation. The 15% recommendation is a hedge against that possibility.
If people want to invest in gold and gold stocks to sell in the future for a profit, that’s fine, but that is in addition to our 15% recommendation.
DENNIS: Rob, thank you again for taking the time to help our readers.
ROB: My pleasure Dennis.
There you have it. An offshore account is legal as long as you comply with the law. If you don’t feel you have an account large enough to send money offshore, don’t give up on diversification – go to plan B. Hold some of your wealth outside of US dollars and pick good alternatives.
Diversification is a no-brainer if you do it right. There are some fine international companies that are great investments. Pick the alternative that is right for you.
|Disclosure. As we have a lot of new readers, I want to remind everyone that I have an account with WHVP.
I DO NOT recommend, or endorse any financial manager; each person’s needs are different. I have no financial arrangement with WHVP. Rob is an international subject matter expert who was kind enough to share his experience for our benefit.
On the Lighter Side
When we bought our home, the realtor told us our back yard was adjacent to a nature preserve. Where I grew up, it was called a ditch.
We have spotted rodents, rabbits, bobcats, coyotes, javelina, and many different birds all in residence. One particular woodpecker takes great pleasure in pecking away at our metal chimney at 6:00 AM.
We enjoy sitting out in the dark listening for the sounds of hooting owls, howling coyotes and sometimes-vicious sounds signaling the hunt for prey was successful. Pet owners are particularly careful in our neighborhood.
When they took off, the big boy had a huge wingspan; a good five feet across. It was majestic! I will confess – we enjoy our backyard ditch….
Friend Snow C. supplied the humor for this week:
Until next time…