Currency risk

[Jamese20]

Hi,

I am in the UK and just trying to get my head around currency Risk and what others feel about it

Some like to say it adds diversification but others say it's an added risk with no logic at all to mean higher reward.

I think it's sensible to have a global outlook if your only 6-7% of the market which I believe the UK only is in terms of market cap.

I just wanted to get clarity that I am doing the right thing with my pensions and my soon to be index fund investing along with my son's junior ISA

[Jamese20]

Hi

i am from the UK and wanted to get some perspective on currency risk and just trying to get my head around it to ensure i am doing the right thing by my pensions and investing and also my sons junior ISA

is it a good diversification? or is it just an added risk that should be avoided? I hear people say it evens out over the long term but the pound over the long term has more or less consistently been weakening against the dollar, for example, maybe a good thing, if you have invested over the last 30 years as the dollar would mean more sterling for you.

I have my pensions in global funds and my index funds will be global also, my sons junior ISA is too, it seems to be performing ok within expectation but we are in a bull market.

your thoughts would be greatly appreciated, I am trying to learn all about investing and mainly all the good advice comes from the US, but not so much here in this country, wade Pfau also states the uk to be more like 3.5% SWR for example, but I think it means assuming you are a UK investor invest in UK only stocks - I guess with global funds 4% should be considered all the same?

I like buffets approach of the S&P 500 and trust it will do well over time, but that advice is for Americans

[nereo]

Well, for starters, the pound has NOT "over the long term has more or less consistently been weakening against the dollar". 
In real adjusted terms what's notable is how the mean exchange rate has changed little since WWII, though there's quite a bit of volatility (see chart below).  Most people consider only the GBP/USD number and ignore inflationary differences.

Personally, I don't see any point in investing in currencies. Lots of smart people spend their careers looking for small edges, and the idea that you as an individual investor might find an edge they don't seems dubious. 
More to the point, if oyu are investing in equities those companies are already influenced by changes in currencies.  If you invest in various sectors (e.g. US's SP500; European MSCI; Emerging markets) those will expose you to their respective currencies.

[Jamese20]

In fairness,

I didn't take into account deflation or inflation so you are right

I don't mean I want to start currency trading I meant due to the global investments I make should I not worry so much about the currency differences over the long term

Based on your charts it would say I shouldn't and should just decide whether I do a buffet approach or just stick it in a global tracker index and forget about it for 10-15 years to see where it takes me

[anisotropy]

I will provide my perspective as a Canadian regarding currency risks when investing in foreign equities. We have access to hedged and unhedged index etfs here that track ~s&p but are traded in $CAD, for example, VUS and VUN. In case it wasn't clear, when you buy an unhedged index etf, you are taking the currency risk.

Most people would say just get the unhedged version and forget about it since currency hedging is not perfect and the mer can be slightly higher than the unhedged versions in many cases.

It is my observation that over long periods of time, ie, 20+ years, the total returns of the two had been roughly the same. It makes sense, after all, as strong home currency (in this case USD) typically has negative effects on the international portion of the earnings. Granted, neither VUS nor VUN had been around for 20 years, I made my observation using a patched-up VUN by stitching s&P returns with exchange rate differences.

In shorter time frames, either one could vastly outperform the other. VUN outperformed VUS by sizeable margin between 2013-2015 due to a weakening CAD, only to get completely trounced in 2017.

One could potentially make money by jumping back and forth of hedged and unhedged versions of index etfs but I don't see it being viable for most people. My personal record on this has been spotty.

[ChpBstrd]

I think you mean not owning stocks/bonds from only your home country. Yes, that's very reasonable. More so post-Brexit.

If you mean hedging your exposure to locally high inflation or currency depreciation, that's a little harder. Owning companies that can raise prices and earn a significant percentage of their money overseas helps to an extent. Bonds are definitely bad news in a rising-inflation environment. Overseas real estate companies might be a good bet because inflation/devaluation reduces the real cost of their debts, raises the replacement cost of buildings thereby raising their value, and justifies rent increases.

Beyond those moves, you'd have to dabble in futures contracts or funds that do so.

[PDXTabs]

I'm a dual US/UK national that has spent his entire working life on the west coast of the United States, but probably wants to relocate to either Scotland or continental Europe ~2030. My way to deal with this is to keep 100% of my retirement accounts in VTWSX.