These posts were moved from this thread Brendan Burgess explains how to protect your deposits
I have reedited the thread to emphasise the key point that all alternatives to deposits in euro carry risk - Brendan
IMPORTANT
The following quotes are taken directly from the above key post. It is important to stess that empirical evidence suggests that the following statements made are factually inaccurate:
"What about buying shares directly?
Buying shares directly is a good way to get exposure to foreign currencies. Most blue chip Irish companies such as CRH, DCC, and Aryzta have earnings in a combination of euro, dollars and sterling. ( Note: the author owns shares in these companies)"
"What about gold and other precious metals?
These are very risky."
Analysis of CRH compared to the spot price of gold over the period Jan 1999 to June 2010 in Euros
Source: Bloomberg for all following analysis.
Average annual return
Gold 13.55%pa
CRH 3.05%pa
Average volatilty as measured by Standard Deviation
Gold 16.79
CRH 29.61
Since 1999 CRH has been more risky than gold yet the post claims that an investment in precious metals is "very risky" and suggests investing in CRH is a "Blue Chip investment".
Out of sample tests:
To set aside any claims of data mining I have tested the volatility of gold in Irish Pounds since 1986 to October 2010
The average annual return was 6.49%pa
Average annual volatility 15.38%
Testing in US Dollars over the period Jan 1970 to October 2010
Average annual return 12.03%pa
Average annual volatility 26.24
Over all these periods the average annual volatility of the spot price of gold has been LOWER than an investment in a single company like CRH suggesting that an investment in gold over the last 40 years has been less risky than an investment in any randomly selected single company (especially if that company was Anglo Irish Bank. Northern Rock, Bradford & Bingley, AIB, Bank of Ireland, Enron, Worldcom, British Telecom, Marconi, Energis, etc etc etc).
For additional reference the following selection of shares had the following characteristics:
All data in Irish Pounds/Euros over the period Dec 1990 Dec 2008
Stock Average annual volatility
Wal Mart 26.39
Intel 43.19
Bank of Ireland 33.01
Tesco 24.14
Aviva 28.48
Vodaphone 30.86
AIB 33.12
Pfizer 25.31
Gold 14.94
Secondly "the best way to protect against inflation is to hold real assets such as property or shares."
Let's consider the period December 1961 to January 1975 in US Dollars.
US Consumer price inflation averaged 4.28%pa
S&P 500 average 3.97%pa
Shares can be a poor "hedge" against inflation over extremely long periods and there is no guarantee that real assets such as equities or property WILL be a good hedge against rising prices. Equally commodities can be a poor hedge against inflation contrary to popular opinion.
The reason for this is that the variation in equity, property and commodity prices relative to the volatility of inflation means that the volatility of real assets swamps the variation from month to month of inflation.
The annual standard deviation of inflation over the period above was just 1.06% whereas the volatility of the S&P 500 was 14.58%.
If investors are looking for a reliable hedge against inflation they need something that has a low volatility options such as T Bills or Treasury Notes are more reliable hedges against inflation.
Volatility of One month T Bills over this period was 0.47% and the average annual return was 4.89%pa ( a positive return above inflation).
5 Year Treasure Notes average an annual return of 4.74%pa with a volatility of 4.05%. Again a positive real return with low volatility.
Therefore investors seeking to offset inflation risk are better off using short-term fixed interest rather than real assets if they want a more reliable hedge.
Out of sample test to confirm these assertions:
Period Jan 1926 to October 2010 in US Dollars
US Consumer price index average 3%pa
US One Month T Bills 3.62%pa
5 Year Treasury Notes 5.39%pa
Conclusion: Short term fixed interest is a reliable hedge against inflation whereas real assets are a less reliable hedge.
I have reedited the thread to emphasise the key point that all alternatives to deposits in euro carry risk - Brendan
IMPORTANT
The following quotes are taken directly from the above key post. It is important to stess that empirical evidence suggests that the following statements made are factually inaccurate:
"What about buying shares directly?
Buying shares directly is a good way to get exposure to foreign currencies. Most blue chip Irish companies such as CRH, DCC, and Aryzta have earnings in a combination of euro, dollars and sterling. ( Note: the author owns shares in these companies)"
"What about gold and other precious metals?
These are very risky."
Analysis of CRH compared to the spot price of gold over the period Jan 1999 to June 2010 in Euros
Source: Bloomberg for all following analysis.
Average annual return
Gold 13.55%pa
CRH 3.05%pa
Average volatilty as measured by Standard Deviation
Gold 16.79
CRH 29.61
Since 1999 CRH has been more risky than gold yet the post claims that an investment in precious metals is "very risky" and suggests investing in CRH is a "Blue Chip investment".
Out of sample tests:
To set aside any claims of data mining I have tested the volatility of gold in Irish Pounds since 1986 to October 2010
The average annual return was 6.49%pa
Average annual volatility 15.38%
Testing in US Dollars over the period Jan 1970 to October 2010
Average annual return 12.03%pa
Average annual volatility 26.24
Over all these periods the average annual volatility of the spot price of gold has been LOWER than an investment in a single company like CRH suggesting that an investment in gold over the last 40 years has been less risky than an investment in any randomly selected single company (especially if that company was Anglo Irish Bank. Northern Rock, Bradford & Bingley, AIB, Bank of Ireland, Enron, Worldcom, British Telecom, Marconi, Energis, etc etc etc).
For additional reference the following selection of shares had the following characteristics:
All data in Irish Pounds/Euros over the period Dec 1990 Dec 2008
Stock Average annual volatility
Wal Mart 26.39
Intel 43.19
Bank of Ireland 33.01
Tesco 24.14
Aviva 28.48
Vodaphone 30.86
AIB 33.12
Pfizer 25.31
Gold 14.94
Secondly "the best way to protect against inflation is to hold real assets such as property or shares."
Let's consider the period December 1961 to January 1975 in US Dollars.
US Consumer price inflation averaged 4.28%pa
S&P 500 average 3.97%pa
Shares can be a poor "hedge" against inflation over extremely long periods and there is no guarantee that real assets such as equities or property WILL be a good hedge against rising prices. Equally commodities can be a poor hedge against inflation contrary to popular opinion.
The reason for this is that the variation in equity, property and commodity prices relative to the volatility of inflation means that the volatility of real assets swamps the variation from month to month of inflation.
The annual standard deviation of inflation over the period above was just 1.06% whereas the volatility of the S&P 500 was 14.58%.
If investors are looking for a reliable hedge against inflation they need something that has a low volatility options such as T Bills or Treasury Notes are more reliable hedges against inflation.
Volatility of One month T Bills over this period was 0.47% and the average annual return was 4.89%pa ( a positive return above inflation).
5 Year Treasure Notes average an annual return of 4.74%pa with a volatility of 4.05%. Again a positive real return with low volatility.
Therefore investors seeking to offset inflation risk are better off using short-term fixed interest rather than real assets if they want a more reliable hedge.
Out of sample test to confirm these assertions:
Period Jan 1926 to October 2010 in US Dollars
US Consumer price index average 3%pa
US One Month T Bills 3.62%pa
5 Year Treasury Notes 5.39%pa
Conclusion: Short term fixed interest is a reliable hedge against inflation whereas real assets are a less reliable hedge.
