Currency risk from a European perspective

[dividend hamster]

No, I'm not talking about the Euro collapsing. There is no way to protect me from this other than a couple of Kruegerrands that I keep.

I'm confused by the advice of John Bogle and Warren Buffett (he said it indirectly) who say you should only invest in the US. I understand where they're coming from and don't think it's necessarily a bad idea for US citizens. However, I don't think you should do it because it's not diversified enough. Black swans, San Andreas Fault, nuclear power plants...I'm just making stuff up here, but that's why I think you should invest globally.

Which is what I've been doing with ETFs that track the MSCI World (about 60% USA), MSCI Emerging Markets, some small caps for extra growth, some value large caps for stability. The historical return of my allocation is very good, the volatility is something I can live with and I'll be a good B&H investor. There's only one thing that I can't seem to think through and that's currency risk. The ETFs are mostly in USD and some are in EUR. Can someone who really understands all this, tell me how risky a global allocation is for someone who has to buy his stuff with Euros? And is there a way to hedge my risk?

[WerKater]

Don't worry about it too much. Through your index funds you are not invested in a currency, you are invested in companies.

Whether a fund is denoted in EUR or USD does not matter at all. One share of iShares MSCI World contains 0.006 shares of Apple. More generally, any MSCI World fund consists of 1.88% Apple. Whether you consider the value of the fund in EUR or USD is irrelevant for that.

Sure, if the USD should ever completely and utterly tank, that will have serious repercussions on American companies and, therefore, your investments. However, such a black swan scenario will influence European companies, too.
Of course, it is not unlikely that there will be some significant fluctuations in the EUR/USD exchange rate that will influence the details of how your portfolio is doing. But in the long run what counts is how well the companies you are owning do. And then we come back to diversification. By investing everywhere, you are decreasing your total risk because you are making yourself less dependent on one single currency or economic region.

My own asset allocation (within the stock part of my portfolio) is roughly 40% Europe, 35% US, 25% EM (the exact numbers are pretty arbitrary in my opinion and in the long run probably irrelevant). I don't hedge currency risk at all and I am happy with that.