3 way ETF investment with FX exposure

gleesonger

I'm looking for your opinion on this investment strategy, especially with anything I havn't considered.
I plan to put away 1k a month and want a return greater than that offered by the banks but at the same time not to be exposed to high risk over the long term.
The timescale is aprox 7yrs and the base currency is the euro. I want to be as cost (tax & admin charges) efficient as possible.

I plan to use 3 different ETFs which track: S&P500,FTSE250,A german ETF. Ie. 3 ETFs each with a very high capital value each based on a different currency.

Once a month I will invest in which ever ETF taking FX rates into account is at the lowest relative to the 6yr stock avg,1 yr FX avg. If at anytime either due to a depreciation in the local currency and\or a fall in the ETFs value there is a large difference between two of my funds I will transfer a portion from the strongest into the weakest. All dividends will be reinvested.

My assumptions are such: There is no strong correlation between FX and stocks. Markets are unpredictable but return eventually (time<=3.5yrs) to some sort of long run average.

The idea of transferring into the lowest allows me to capture capital gains over the long run.

If there any applicable papers\articles I would appreciate the links.

hmmm

I don't understand what you're trying to achieve with all the FX stuff. The other assumptions look reasonable.

If you're going to rebalance a portfolio, generally that is done to rebalance risk. Again I don't understand the FX based rebalancing.

The idea of transferring into the lowest allows me to capture capital gains over the long run.

What?

gleesonger

Both questions answered with the assumption that I made.
That both the FX and equity markets will return to some long run average.
Transferring into the lowest is just another way of saying that at a certain time I will deem the ETF\FX to be under priced.

"All the FX stuff" is just a way to try and capture some of the gains that can be made from FX trading.

soddy1979

I don't think you can say that FX markets will return to a long run average. In the long run, FX rates should be based on the levels of economic activity of two countries which should translate into theory such as PPP.

I also think your time period of markets averaging out over less than or equal to 3.5 years sounds arbitrary. Your assumption seems to be that if you buy the best value, relative to the other two, you will capture the capital gains that will accrue as the market returns to average levels over the course of seven years (which again is arbitrary).

Your also solidly invested in equity. If equity markets crash in 6.5 years you are screwed. You might look at diversifying into another asset class(es).

That being said, I do like the your idea of having a solid framework to buy the relatively best value of the three markets.

gleesonger

soddy1979 wrote: »

If equity markets crash in 6.5 years you are screwed

The 7yr mark is more of a guidline I have no liabilites (as of yet) so I'm not fixed to any particular point in time.

soddy1979 wrote: »

which again is arbitrary

Yes your right all the assumtion values I mentioned were arbitrarly chossen.

I intend to build a mote carlo model which will be driven by a risk netural scenario generator (Professionaly built,Tillinghast I believe).

I intend to define my paramters (long-run avg, speed of mean regression,...) based on the best estimate results of the simulation.

soddy1979 wrote: »

Your also solidly invested in equity

I can only model bonds (risk free interest) and equites, so that is all I am comfortable dealing with.

At the moment I'm just brain storming, trying to find a medium to long term investment strategy which suits me best. I would be very suprised if what I initialy proposed is what is actually implemented