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For a globally diversified buy and hold portfolio for retirement, it is often advised to invest a percentage (such as 30 %) of the overall portfolio in safe assets to lower the volatility associated with equity investments. A classic safe asset are sovereign bonds of highly rated governments, such as Germany, Austria, the Netherlands or the United States.

However, if the investor is not residing in the eurozone or the United States, investments in such stable government bonds come with a currency risk, as the local currency usually fluctuates in relation to the euro or dollar. In addition, local inflation may also be higher than the inflation rate of those countries. I would therefore imagine that the currency and inflation risk make such government bonds less suitable for the safe part of your portfolio if you are a resident of a developing country.

At the same time, investing in local government bonds may also not be ideal for the safe part of your portfolio, as bonds issued by developing countries are more risky, with developing countries more likely to default.

Hence, the question: From which assets to construct the safe part of a buy and hold portfolio as resident of a developing country?

I was thinking that perhaps a mixture of local government bonds with short maturities and a basket of highly rated government bonds from around the world (such as the Bloomberg World Government Inflation-Linked Bond index) could do the trick. This would keep the currency risk in check (the various currencies could partially cancel each others' movements out and the local bonds would not have any currency risk) and reduce the inflation risk thanks to the investment in the local government bonds with short maturities. At the same time it would minimize the risk of government default due to the portfolio's global exposure to stable jurisdictions.

The country of residence in question is Poland (rated as investment grade but not as AAA) but I wanted to formulate the question in a general manner so that other readers can also benefit from the answers.

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    Note that currency risk is only relevant if the funds you are investing are different than the currency you will use when you retire. eg. Currency risk of the Zloty is irrelevant if you will retire in Poland. Of course as you point out, there is potentially inflation risk higher than expected for a 'safe' asset. To many, these two items will seem similar, but the difference can be highly relevant.
    – Grade 'Eh' Bacon
    Commented Sep 17 at 15:20
  • @Grade'Eh'Bacon: But if I invest in an index consisting foreign government bonds, these will be denominated in their respective currencies. Doesn't that imply a currency risk vis a vis those currencies?
    – Bonilla
    Commented Sep 18 at 19:25
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    Correct - if you plan on retiring in Poland and expect your retirement expenses to be paid in Zloty, then any currency except zloty represents a potential currency risk. To your point made further in your answer about 'multiple foreign currencies offsetting eachothers' currency risk', that may be true to a degree, but ultimately you would still be left with the risk that the average of all those currencies, moves against the Zloty [eg. That the Zloty strengthens vs the average, and your funds can no longer buy as much in local goods].
    – Grade 'Eh' Bacon
    Commented Sep 19 at 13:15
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    That doesn't mean your suggestion is a poor one, just trying to highlight that the currency risk isn't removed. Many people invest in global financial centres outside their own country, so what you are suggesting would be I think fairly typical [not that I am recommending one way or the other; I am not knowledgable about Poland].
    – Grade 'Eh' Bacon
    Commented Sep 19 at 13:17

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