Wednesday, October 23, 2013

Katsman, Retirement GPS

Aaron Katsman’s Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing (McGraw-Hill, 2013) offers a look at how to invest in foreign stocks and bonds. Even if you don’t agree with the author’s recommendation that 50% of a retirement portfolio be allocated to international stocks and bonds (being more tactically inclined, I personally am uneasy with such fixed allocations), you can still profit from some of his tips.

The GPS portfolio is based on macro events and macro trends. In deciding whether to invest in a particular country, Katsman asks such questions as whether it has a stable political climate, economic freedom, a young population and a growing middle class, a projected GDP growth with lower inflation for the following year, and a diversified economy. The countries that shine right now in these respects are the Asian Tigers (Hong Kong, South Korea, Taiwan, and Singapore), Australia, ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), Colombia, Peru, Israel, and Turkey.

As to investing in global bonds, Katsman points out that over 15 years (ending in 2011) a hedged global bond portfolio, one which tries to neutralize the impact of currency swings, had returns very similar to those on U.S. bonds but with less volatility. Mind you, the cost of currency hedging can be quite steep.

Most investors are probably reasonably familiar with global stocks and how to access them. International bonds are more of a mystery. The retail global bond investor has three basic alternatives: individual bonds, bond funds, and ETFs. Unless an investor has a very large portfolio, the first alternative is not practical. So on to alternative two. The investor who opts for a mutual fund will be subject to fees that can eat into returns. Moreover, unlike individual bonds, there is no guarantee of principal in a bond fund. And, of course, it’s important to monitor the fund manager. As for ETFs, passive emerging market or global bond funds are flawed because passive investment simply does not work in fixed income, especially in emerging markets; “most of the bonds in the index are not available to be bought.” (p. 128)

Katsman’s book meanders into some unexpected byways, such as crowd funding, that probably wouldn’t figure in most portfolios. And he veers away from the main theme of the book when he advocates for financial advisors (yes, he is one of them). But even if this book lacks the rigor of most mainstream investing books and leaves many questions unanswered, it offers some useful advice. The reader can fill in the gaps elsewhere.

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