Author Topic: Investing in one country, living in another: an exchange rate lottery?  (Read 5090 times)

Taffy

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Novice question: If I'm planning to live long-term in the UK, and investing in US stocks with a view to holding for 30 years or more, what impact does currency fluctuation have on this picture? The US is more economically diversified and more dynamic than my home nation, and makes more sense to invest in. But if sterling hits 1:2.50 against the dollar (it's currently around 1:1.60), any gains will be destroyed by the currency change, right?

So, what kind of investment strategies offer a hedge against a long-term change in the currency balance between the nation in which you make your money (through your stash), and the one in which you spend it?

gooki

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #1 on: October 09, 2012, 02:16:26 PM »
You can't.... My international investments are much shorter term, but the way I live with it are:

1. Dollar cost averaging. Invest regularly to ensure you smooth out both exchange rate fluctuations and stock fluctuations.
2. Do the reverse when withdrawing funds for the exact same reason.
3. Accept the exchange rate isn't always going to be favourable, and understand you'll never be able to time the market perfectly.
4. Keep some investments local (for me that's housing as it both provides utility for my family, and is somewhat inflation proof).

Taffy

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #2 on: October 10, 2012, 08:38:13 AM »
Thanks gooki, that's helpful. I wouldn't want to put all my eggs in the UK basket, as I don't see much light on the horizon for those rainy isles.

CB

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #3 on: October 10, 2012, 10:07:15 AM »
The real exchange rate (i.e. the ratio of the purchasing power of the two currencies) between the USD and GBP is relatively stable and oscillates around 1.0 much more closely than many other pairs of world currencies.  As long as you have a long time horizon I wouldn't worry too much about UK-US exchange rates.  If you want to keep an eye on RER fluctuations the Bank for International Settlements provides a nice monthly time series at http://www.bis.org/statistics/eer/index.htm

Taffy

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #4 on: October 11, 2012, 12:13:39 AM »
Interesting, thanks CB. That helps assuage my worries a little, but it still seems like some local investments are in order as part of the portfolio.

catalana

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #5 on: October 11, 2012, 02:41:42 AM »
Thanks gooki, that's helpful. I wouldn't want to put all my eggs in the UK basket, as I don't see much light on the horizon for those rainy isles.
Couple of simple ideas...

Pick UK listed stocks that make their money worldwide.  That way the company is managing the exchange rate risk rather than you.  e.g. In my stash I have Standard Chartered, PZ Cussons, Astrazeneca, Fiberweb, Vodafone.

Don't give yourself a single exchange rate risk by investing solely in one currency.  Again, the same applies in that many US companies will generate revenue around the world, but you are adding risk by then having to convert dollars to sterling.  If the US economy or currency goes tits up (e.g. by no longer being accepted as the reserve currency, or continuing with massive quantitative easing) you are screwed.  Spread your stash around the globe for diversification amongst equities as an asset class.  e.g.  In my stash I also have funds in Europe, Japan, Emerging Markets, Global Resources and Tech (which is predominantly US stocks).  Again, these are UK hosted funds so someone far more experienced than me is managing the ex-rate risk.

Taffy

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #6 on: October 11, 2012, 03:19:02 AM »
I think the first is out for me, as I really don't want to be picking stocks, but the second makes sense. Spreading the currency risk around is a good idea. Thanks.

Richard3

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Re: Investing in one country, living in another: an exchange rate lottery?
« Reply #7 on: October 15, 2012, 02:52:03 PM »
Personally I am worried about the pound going down (since I have investments in pounds but won't be living in the UK much longer) so it could equally go the other way. The good news is that a weaker USD is good news for a lot of big US companies (for example Coke makes about 2/3rds of its money outside North America -  http://seekingalpha.com/article/618561-coca-cola-keeping-investors-smiling ).

I'd also echo that as with just about any risk, diversification is key don't just commit to the US market.