Immunising portfolios against Covid-19 and other Black Swans

While it's good to have a thread about the economic impact of the Coronavirus on the NZ economy, I think it's at least equally valuable to discuss ideas on hedging investments, so as to protect or even enhance our investment returns should the worst case scenario eventuate.

Interesting to read about Beijing propping up Chinese markets https://www.ccn.com/are-overstimulat...navirus-risks/ (a bit tabloid but still useful)

I stole the name from this post on an Australian site, which is a good starting point for discussion
https://www.livewiremarkets.com/wire...obal-solutions

i have long bond positions and I did manage to sell out of some silver that I'd purchased lower. So , traditional hedging measures still apply I think.
ON some thread there were bear ETF's for the ASX mentioned. So you could use those or short an index. Or take out some puts

Cheers Peat. I've only invested in shares and property up til now. What do you suggest in the way of easy to access bond funds (esp unhedged USD)?

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.

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Originally Posted by SBQ

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.

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That's interesting.

The only two reasons I can think of for "physically" moving money from one country to another is (a) you don't trust the institutions in the "from" country or (b) the investment you want to make is not available in the "from" country.

But don't underestimate bonds. A couple of my bond funds have returned me 13% over the past year, and are currently in quite pleasing uptrends. But I suspect we may have different objectives - and timeframes!

We have bought some $US too and fixed some money for 4 and 5 months. The rates are ahead of inflation and protected from this rollercoaster mkt that has arrived.

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Originally Posted by GTM 3442

That's interesting.

The only two reasons I can think of for "physically" moving money from one country to another is (a) you don't trust the institutions in the "from" country or (b) the investment you want to make is not available in the "from" country.

But don't underestimate bonds. A couple of my bond funds have returned me 13% over the past year, and are currently in quite pleasing uptrends. But I suspect we may have different objectives - and timeframes!

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The primary reason for investing abroad is to minimise tax. Can't physically move funds outside of NZ in large amount un-noticed and large cash amounts would be a problem depositing it in any bank ; all major brokerage firms don't accept direct cash deposits anyways.

Point A): Trust is not the issue but I do have a problem with 'institutions' in NZ charging obscene fees (managing / account balance fees, etc).

Point B): NZ represents many 0.3% of the global investment field - That figure alone presents a diversification issue unless you believe NZ is the centre of the world for investments. The NZ tax laws appear to slate it that way (vastly discriminating between NZ vs foreign investments).

Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options. Being taxed up to 33% on interest income vs tax free capital gain? I also understand the general rule that at retirement, elderly age, the change of investment class from equities to interest bearing investments should be done. Myself, I don't subscribe to that thought but instead if I want a return on my investment, I would sell a bit of my shares to lock in capital gains ; and only on years that I would want that income. Not all people in retirement age expect a fixed interest income as once it's paid... they're stuck with it? This also applies to dividends. I don't want to be stuck with excessive amount of dividends paid year after year when I would have no plans to spend it.

Ah yes, tax. It's not my strong point - which means it's something I tend to forget about.

Your thoughts on bonds are interesting. I can see that we view them quite differently, especially with regard to income vs liquidity. I'll have to spend some time going over what you wrote.

Now out of idle curiosity, who are these "institutions". From my experience, New Zealand is one of the cheaper places in the world to own financial assets. Can you help me out here?

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Originally Posted by GTM 3442

Ah yes, tax. It's not my strong point - which means it's something I tend to forget about.

Your thoughts on bonds are interesting. I can see that we view them quite differently, especially with regard to income vs liquidity. I'll have to spend some time going over what you wrote.

Now out of idle curiosity, who are these "institutions". From my experience, New Zealand is one of the cheaper places in the world to own financial assets. Can you help me out here?

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Yes not only tax on the individual level but also the tax at the company level.

In Finance grade school, our prof told us corporations have 3 main ways to raise capital. 1) Issue more shares 2) borrow cash from the bank & 3) issue bonds. All have issues. ie A reason why Buffet isn't a big fan of owning junk bonds? Because from the point of view from the company, bond issues are a last resort if major or private banks refuse to lend. Have a think about this. Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses? If there are no buyers of bonds, then usually as a last resort, the corporation issues more shares which has a negative impact to existing shareholders (called dilution).

re NZ investing: I have not come across any NZ broker that are competitive to US brokers in terms of commission trades and account management fees. Many US brokers have gone commission free trades and rely making $ off margin accounts. In NZ, Macquires, Craigs, etc have very high brokerage fees when you look to buy overseas shares. On top of this as an example, there's a local Christchurch firm Jarden that charges like a 1% account management fee per year (correct me if i'm wrong but last year I saw one of their presentations and they spoke of such administration fees when they were canvassing new clients). Also they were only interested in clients with +$500K in wealth to invest with them. I assume that would be no different to various Kiwi Saver Funds that charge similar fees. Ie. US Vanguard ETF 0.08% vs using a NZ managed fund to buy the exact same Vanguard ETF but they charge 0.8% per year (they say it's to cover tax compliance FIF / documentation etc.)

Anyways.. today we've seen the true impact of what COVID19 can do with the share market. A near 1,200 pt drop for the DOW is significant. I hope you all are buying.

Quote:

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Originally Posted by SBQ

Have moved my funds overseas. Not sticking around for the NZD to plummet under 0.60
Forget about bonds or interest bearing cash deposits - if this COVID19 is going to keep spreading, central banks WILL lower rates. I keep hearing the Labour Gov't splashing out more and more $ out to beneficiaries and social programs - but no mention on the IRD impact of tax revenue? If our NZ economy is going in the sewer, so will the tax take, and so will the NZ gov't be forced to borrow more 'external funds' which ultimately, will negatively impact the NZD currency.

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Is this not the same for every other country though?

Quote:

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Originally Posted by SBQ

Yes not only tax on the individual level but also the tax at the company level.

In Finance grade school, our prof told us corporations have 3 main ways to raise capital. 1) Issue more shares 2) borrow cash from the bank & 3) issue bonds. All have issues. ie A reason why Buffet isn't a big fan of owning junk bonds? Because from the point of view from the company, bond issues are a last resort if major or private banks refuse to lend. Have a think about this. Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses? If there are no buyers of bonds, then usually as a last resort, the corporation issues more shares which has a negative impact to existing shareholders (called dilution).

re NZ investing: I have not come across any NZ broker that are competitive to US brokers in terms of commission trades and account management fees. Many US brokers have gone commission free trades and rely making $ off margin accounts. In NZ, Macquires, Craigs, etc have very high brokerage fees when you look to buy overseas shares. On top of this as an example, there's a local Christchurch firm Jarden that charges like a 1% account management fee per year (correct me if i'm wrong but last year I saw one of their presentations and they spoke of such administration fees when they were canvassing new clients). Also they were only interested in clients with +$500K in wealth to invest with them. I assume that would be no different to various Kiwi Saver Funds that charge similar fees. Ie. US Vanguard ETF 0.08% vs using a NZ managed fund to buy the exact same Vanguard ETF but they charge 0.8% per year (they say it's to cover tax compliance FIF / documentation etc.)

Anyways.. today we've seen the true impact of what COVID19 can do with the share market. A near 1,200 pt drop for the DOW is significant. I hope you all are buying.

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Indeed. Companies do diversify their source of funds, with equity, bank funding, and bonds.

"Just query why your local banks only lend mortgages on residential properties instead of lending to small businesses?"
Banks do lend to small businesses, but they want security for the loan, and for many if not most small businesses, the only security that is available is either a personal guarantee or a mortgage over (residential) property - usually the small business-owner's house. I suspect that this is simply a result of the retail banks making most of their money from residential property loans, and having little understanding of anything else.

"A reason why Buffet isn't a big fan of owning junk bonds?"
I'm not a fan of junk bonds either. After all, what would it take for an Apple to turn into a Blackberry for example? I run a portfolio of directly held New Zealand bonds, bought at time of issue, to be held to maturity, average credit rating of A. The income goes to fund other investments - bond income provided the funding to buy into the 2013/2014 New Zealand electricity company floats.

". . . a local Christchurch firm Jarden. . .
They're actually a diversified national financial services company, ex First NZ Capital ex Credit Suisse/First Boston. Last time I talked to them (2015?), the 1% annual account management fee came down to well under 0.5%. I suspect that it depends on what you want from them.

Out of idle curiosity, when I own shares and bonds in New Zealand, these are held at the registry in my name, without any third party custodial arrangements. Is this the case in the US/Canada, or are shareholdings/bonds held by the broker - with or without DIMS?

"Bonds have their place... but in Warren Buffet's books (and he's getting near 90 years old), don't waste your time unless you're the person that can name the terms of the bond rate with warrants and options
Can you explain what this actually means? The "warrants/options" makes no sense to me in the context of holding individual bonds.

Thanks for the posts, I'm learning a lot.

Hedging investment number #1... not even debatable...
The Dow Jones just had the biggest fall OF ALL TIME and crypto is booming... every coin in the top 70 is up...
:cool:
.^sc

Yes as i expected youve been salivating at the spread of this virus and i indeed could smell the anticipation on your breath.

If crypto doesn't have your attention now then yah might aswell sink your own battle ship... turn a Kamakazi on yourself and just sink that pup....
:cool:
.^sc

Joshuaaatreeeeeee
Timbbbbeerrrrrrrrr...
Is that why they call you mr tree....
:t_up:
.^sc