understandingJH wrote:To me it looks like hedged has less volatility and slightly lower returns.
Exactly what you'd expect. Currency-hedged bonds should look like bonds, but incur the cost of the hedging. Unhedged bonds should look like bonds times currency, and currency is volatile.
And the currency risk problem is one I still don't understand be it stocks or bonds. Over the long term wouldn't it all even out?
Yes, that's the problem. It all evens out means no extra return. But you're taking extra risk. Extra risk for no extra return is bad.
To put it another way, if you were willing to take extra risk to get extra return, you'd already be taking it. So, you don't
want to increase your risk. But, if you displace hedged or dollar-denominated bonds with unhedged foreign-currency-denominated bonds, you have added to the risk of your portfolio, so you need to cut back risk somewhere else
. The obvious way to do this is to cut your overall stock allocation. But that means you are cutting back on the higher-returning asset class.
In other words, you either get extra risk for no return, or you can retune your portfolio and get the same risk but lower return. Extra risk is bad in itself
. Extra risk may be worth it if you get extra return. Extra risk is not worth it if all it happens is that it "just evens out in the end."
Now, if the volatile asset is uncorrelated
, you do
get a risk-reduction effect. We've had unresolved arguments about that, and I don't want to open it up again, but I am at the moment pigheadedly, stubbornly convinced that a zero-return asset does not improve a portfolio unless it has, not just low
correlation, not just no
correlation, but negative
correlation with an asset that has a positive return. And I am also stubbornly convinced that there aren't any assets that show consistent, sustained negative correlations with stocks. Because of the vagaries of random sampling, a zero-return asset may show positive correlation over one time period and negative over another, and during the time period that accidentally has negative correlation, it will temporarily and accidentally improve the portfolio's numbers over that particular time period.
Let's just say that adding zero-return volatile assets, such as currency and/or commodities to a portfolio, is not a slam-dunk improvement. Vanguard doesn't think it's an improvement. People who are sure they know which way the dollar is going to move think it's an improvement, but they are speculating in both senses of the word.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.