Canadian Currency Conundrum

[martin]

Buy a cheap vanguard ETF tracking the whole US market is great advice, and Vanguard is now available in the True North.
But if you are buying it in CDN$ then the underlying fund performance is dominated by currency fluctuations.

The CDN/US $ is currently around 10% below historical average, down 20% from a year ago (causing lots of Canadian banks to be smug about the 20% gains on their mutual funds).
Does it still make sense to buy the SP500 with expensive US$ when the likelyhood is that I will be taking the returns out in future expensive CDN$?

Is the sensible response to buy more Canadian funds when the CDN$ is low - or is that the twin sins of market timing AND currency speculating?
   

[Ziggurat]

The usual advice (which I agree with) is to stick to your rebalancing as per normal, including the currency effects, to bring yourself back to your pre-decided percentages as valued in your own currency.  http://canadiancouchpotato.com/2015/02/09/rebalancing-with-foreign-currencies/

In other words, don't worry, create a plan which is comfortable for you, and then buy accordingly.  When currency or stocks values have been favourable, you will sell some of that in the rebalancing; when they are not favourable, you will effectively be buying less.

[691175002]

Most intuition behind currency movements are not reflective of reality.  Currencies are not mean reverting (for example, two countries with different inflation rates should expect the currencies to diverge forever).  Expecting the CAD to revert is basically expecting a strong rally in oil.

I recently purchased VXC (Vanguard World ex-Canada).  I'm not sure I would be comfortable buying straight S&P500 at this point.  At least with VXC you are only dumping half the money into the US.

[nobodyspecial]

>Currencies are not mean reverting
Although the Canadian economy is so dependent on the USA (until the manage to sell oil/gas to China) that the CDN$ is essentially a US oil stock.

Another argument is that the CDN$ doesn't really fluctuate with the US$ at all. Since oil, and everything you buy in stores is linked to the US$ the real difference is much smaller. Your funds grow in US$, you get paid out in CDN$ but the price you pay in the shops is ultimately set by US$.   

[martin]

That's pretty much the advice I was following - the US/CDN just adds to the volatility, but us Canadian Mustachians like excitement and wild times.

I have 60% total US, 30% World ex-N America and 10% emerging (as a lottery)  and I "rebalance" by just buying a bit extra of whatever has done worst that month. I don't sell anything yet so not really re-balancing.

* - my bank won't allow me to have that mix because it isn't diversified enough,  because it doesn't contain any Canadian funds! So I am missing out on the mighty Canadian companies which dominate the world economy, like Blackberry or Bombardier.

[curlyfry]

I am Canadian & also do Vanguard ETFs - I think the consensus is currently one should position more of your portfolio in American and international assets than Canadian ones -as the Canadian economy is expected to have more issues in the near future.  I bought a few stocks of Canadian companies who specifically sell to the US for this reason as well (companies that do well when our dollar is low easier)

[brainfart]

curlyfry, that sounds like market timing. Keep emotions out of investing.

martin, welcome to being an international investor. That's what the rest of the world is experiencing and exposed to the moment they invest in indexes calculated in dollars, or directly in American stocks.
There are ways to hedge against currency fluctuations, end even funds which have this kind of hedge included. Usually, this adds complexity and additional cost.
So what exactly are you afraid of? Losing a little performance, or losing a lot? It could even go the  other way... you could win.

In the end, the usual advice is keep things simple, ride out the waves of up and down, nobody can predict the future and in the long run the market always goes up. If you have enough time currency exchange ratios don't matter much. Control your risk with a sound asset allocation.

[powersuitrecall]

Here's what I've noticed while holding VTI and VCN in my portfolio.  When $C dips (usually because of oil), VCN dips (again, because of oil), but VTI gains (because $C dips) ... so the drop in my portfolio is muted.  When $C jumps, the opposite happens.

Having both currencies works nicely in that way.  If there is a strong rally in the dollar, you can bet that VCN will surge along with it.  It aint gonna be bad.

For this reason, I don't really see a need to deviate from my allocation target, even if it means buying VTI while it's "expensive".