Investing in foreign currencies

trenchwars

nrsql wrote: »

Umm. If you invest in a company you will get back more or less than you invest - same as if you buy currency.
If you think that is a 50-50 chance then I don't see a difference.

You are assuming a perfect market for currency but not for shares which is why you perceive a difference. In both cases you are trying to spot (gamble on) market imbalances.

With a company you are hoping that company will do better than other companies. With a currency you are hoping the country that supports it does better than others (actually it's more about perception than reality).

Yes but if I keep all my savings in sterling then I am also gambling that in a year or so it will have the same (or similar) purchasing power that it has now.

nrsql

That's just how you value the investment. You can do it by converting to purchasing power or converting to a currency - doesn't make any difference.

What you should try to do is get the best return - as long as you compare the possibilities in the same manner it doesn't matter.
Of course if you are going to spend in sterling you need to consider the conversion costs at that time

gozomark

nrsql wrote: »

That's just how you value the investment. You can do it by converting to purchasing power or converting to a currency - doesn't make any difference.

What you should try to do is get the best return - as long as you compare the possibilities in the same manner it doesn't matter.
Of course if you are going to spend in sterling you need to consider the conversion costs at that time

you really should go for the best risk adjusted expected return, not the best return

trenchwars

Is no-one on this board the least bit concerned about the direction that the pound is going to go in the coming months?

The BoE have basically announced that they are going to print money to finance government borrowing. When a country starts printing money to service its spending requirements, doesn't that mean it is effectively bankrupt?

Edit: As for which currencies I would buy, I would have a look at IMF data and pick those that look best placed to withstand a recession.

gozomark

trenchwars wrote: »

The BoE have basically announced that they are going to print money to finance government borrowing. When a country starts printing money to service its spending requirements, doesn't that mean it is effectively bankrupt?
.

no - Japan isn't bankrupt. QE is a sensible monetary tool when you cannot lower interest rates any more, and will be carried out by most developed countries this year. One of the problems of the 1930's was that the opposite was done

trenchwars

gozomark wrote: »

no - Japan isn't bankrupt. QE is a sensible monetary tool when you cannot lower interest rates any more, and will be carried out by most developed countries this year. One of the problems of the 1930's was that the opposite was done

My understanding is it wasn't particularly effective in Japan. It's also worth pointing out that the Yen has been significantly devalued over recent years, so is the same thing going to happen to the pound?

If QE is being introduced to fight deflation, which we are told, then I don't see how it is going to work. In my opinion, the reason why prices are likely to fall is due to lack of demand, as people will be reluctant to make big-ticket purchases and will cut back on luxuries if they are worried about job security. In these circumstances I don't see how QE will create demand.

Is it possible that the government are resorting to QE because no other country wants to buy their bonds any more?

gozomark

the yen has actually been quite strong over recent years

QE was arguably effective in Japan, in that it prevented a depression - it also showed that QE doesn't have to lead to inflation.

QE is being introduced because interest rates cannot be lowered any more, and if we enter deflation, real rates wil be much higher than they should be to stimulate the economy. Money velocity is collapsing, so increasing money supply is required to prevent a depression caused by deflation. QE should also lead to lower medium and long term interest rates, as the QEwould presumably take the form of the BoE buying gilts.

Is it possible that the government are resorting to QE because no other country wants to buy their bonds any more? - there is no sign of that - also, QE normally involves buying of bonds by the central bank/govt, not selling

nrsql

gozomark wrote: »

you really should go for the best risk adjusted expected return, not the best return

Already covered

>> If you ignore risk by definition in a perfect market these must give the same return - any imbalances would be flattened by investors moving their money.

In fact including risk should still mean you end up with the same return from every investment over the long term. Zopa gives quite a good demonstration of that with their calculation of the expected return from different interest rates.

gozomark

the problem is - many people misunderstand this, and believe higher risk investments will give you a higher return, just because they are riskier. Its actually the other way round - unless you expect a higher return, you should stick to safer investments.

There is also the issue of peoples risk appetite - given that varies from one person to another, and over time, its not as simple as all investments will give the same risk adjusted returns, as as different people will apply different risk adjustments, so what is the "same"

Lol_UK_2

gozomark wrote: »

no - Japan isn't bankrupt. QE is a sensible monetary tool when you cannot lower interest rates any more, and will be carried out by most developed countries this year. One of the problems of the 1930's was that the opposite was done

Japan had a prolonged recessive period because they pumped money into the economy, and aren't doing too well now either. Printing money has never worked (quote from Jim Rogers on channel 4 interview, among others ) and in fact The Fed, pumping credit into the faltering US economy created the Great Depression.