Dealing with a weakening AUD

[jaysee]

In case you haven't noticed recently, AUD (and certain other currencies) have been weakening relative to USD over the last 10 years.



Source: XE.com

Whether this could have been predicted, and whether it's likely to continue, is of course, up for debate.

However, with this seeming to be an established long-term trend for the time being, it seems to me that it might be sensible for some investors to diversify into USD and perhaps other currencies.

This could be relevant for your if you want to have the option of spending some time living in the US or in another country whose currency is also rising relative to AUD. Of course you plan to spend 100% of your time in Australia, it might not seem so relevant, though even then, I think some amount of foreign currencies could offer a diversification benefit.

Most of my portfolio is in AUD, but as I'm still in accumulation phase, I might be able to balance into other currencies as I invest further.

One option I'm looking at is purchasing US TIPS directly, which I could hold in USD while not losing too much to inflation (fees and CGT notwithstanding).

What are your thoughts?
Have you considered diversifying into other currencies?
Do you think this is necessary or unnecessary, and why?

[chasingthegoodlife]

Beginner comment here- Wouldn’t holding unhedged international funds give you the same result? In terms of maintaining your spending power in USD over the long term.

[deborah]

As we are only a small percentage of the world market, the advice has always been to hold a reasonable percentage in non-Australian investments.

[chevy1956]

Beginner comment here- Wouldn’t holding unhedged international funds give you the same result? In terms of maintaining your spending power in USD over the long term.

I use VGS. I think it's a good idea.

I always liked one guy who stated the best portfolio was an all world stock fund plus a home country bond fund. The bond fund gives you some currency protection and is the safe part of your portfolio whereas the stock gives you long term growth.

[Gremlin]

You have also cherry picked your timeline.  The Aussie Dollar was at its strongest against most currencies over the period 2010 to 2013, corresponding to the mining boom.  So yes, it has declined in the period since.  If you look at a 30 year time horizon, we're slightly below the 30 year average, but not by a lot.

Having said that, we hold roughly 60:40 domestic and international equities in our investments.  Our spending is skewed towards AUD, but we definitely want a decent amount of international exposure.

[jaysee]

Beginner comment here- Wouldn’t holding unhedged international funds give you the same result? In terms of maintaining your spending power in USD over the long term.

As far as risk assets are concerned (stock/bond funds) - good point!

Looking at my index fund portfolio, it seems the wizards at Vanguard have already provided hedging (via Vanguard International Shares Index Fund (Hedged)).

With my small cap value allocation, based on Avantis funds, unfortunately I didn't have a choice, as those funds are all USD-denominated and, presumably, are unhedged, as their Fact Sheets refer to "currency fluctuations" among their "risk considerations". If/when I find an AUD-denominated, hedged small cap value fund, I might consider switching.

When it comes to low-risk assets (directly-held bonds, cash) I think it might make sense to hold some small percentage in currencies of countries I plan to spend time in. Currently I'm considering buying some NZD, GBP, EUR and USD assets. I guess I'll need to go through each country/region and try to find an inflation-linked bond (if any) in that currency.

[jaysee]

As we are only a small percentage of the world market, the advice has always been to hold a reasonable percentage in non-Australian investments.

Seems sensible.

I guess one further question is, which other countries are best to diversify into?

One way is just to go by market-cap, which for stock and bond funds, is as easy a buying a good internationally diversified index fund.

For directly-held bonds/cash, I guess I have to decide myself. So then maybe a rule of thumb is to buy each in proportion to its weight in the international market. For bonds, I guess one could go by the cap-weighting of an international bond fund. For cash, I guess one might go by the cash volume in circulation of each currency.

I'm likely overthinking this, but what the hell, I enjoy nerding out on fixed income. :D

[GilesMM]

If your income and spending are in AUD, why do you care what other currencies do? 


Forex trading is tricky because it is hard to predict the future behavior of currencies.

[jaysee]

If your income and spending are in AUD, why do you care what other currencies do? 

Mainly in case of travel or living abroad, but of course, there's always possibility of some other currency outperforming AUD.

Forex trading is tricky because it is hard to predict the future behavior of currencies.

True. I wouldn't be trying to market-time, just to buy-and-hold safe assets long-term (cash, bonds).

[GilesMM]

If your income and spending are in AUD, why do you care what other currencies do? 

Mainly in case of travel or living abroad, but of course, there's always possibility of some other currency outperforming AUD.

Forex trading is tricky because it is hard to predict the future behavior of currencies.

True. I wouldn't be trying to market-time, just to buy-and-hold safe assets long-term (cash, bonds).

But the AUD is currently on the weak side, so you won't get many USD for them. I would wait until the AUD is strong again if you want to buy cheap USD and hold them a long time.    When the AUD crashed in 2009 I bought heaps of them as I was living in Oz on a US salary.  That covered my AUD spending for several years and didn't have to transfer cash for expenses.

[jaysee]

But the AUD is currently on the weak side, so you won't get many USD for them. I would wait until the AUD is strong again if you want to buy cheap USD and hold them a long time.

Ok yes good point. Probably worth waiting. Or maybe even trying to pick up work that is paid in a different currency such as USD.

When the AUD crashed in 2009 I bought heaps of them as I was living in Oz on a US salary.  That covered my AUD spending for several years and didn't have to transfer cash for expenses.

Nice!

This is the kind of scenario where I think there can be some upside to holding multiple currencies over shorter periods.