The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: NewDay1 on May 18, 2018, 11:48:39 AM
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Hello MMMers,
Do you buy other currencies as a form of investing (not speaking of crypto, but rather non-US currencies)?
Curious about your thoughts on this topic - thanks.
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I do not. Buying currency of any kind is speculation rather than investing.
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Agree with @JAYSLOL, I don't view currencies as investments as they don't actually produce anything of value. Once could argue that it is debt issued by a country and that depending on how the country does the debt will increase or decrease. That to me is a stretch as the country does not pay dividends and is more than likely to just issue more debt.
It's pure speculation for me. Doesn't mean you can't make a profit on it.
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The only reasons I would hold another currency would be if I plan to invest with or buy something using that currency in the short-medium term and don't want the volitility of an exchange rate to mess-up the exact amount I need to put down on something, i.e. a down payment on foreign real estate or something like that. As far as just holding a currency as part of an investment plan, no I'd even buy gold before I held a currency, gold is a terrible investment, but even it at least somewhat keeps up with inflation. Currency, not so much.
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I'd say if you are invested in international stocks, you are essentially exposed to the currencies those companies earn. That is because the earnings of those companies flow back to you in one way or another (dividends, buybacks, debt paydown, or reinvestment) and that value is then converted to dollars through dividend conversions and market pricing. If, for example, the dollar last half its value compared to the yen, then the earnings of your Japanese company would be converted into twice as many dollars. Their buybacks, dividends, reinvestment, and debt reduction would all be worth twice as many dollars than before. Of course, the reverse is also true.
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When the market and the dollar were tanking last time around, I put approx 20% in euro CDs. It worked out but I wouldn't recommend it. Now I have ~40% international index funds.
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As an investment no. However, I do get paid in two different currencies and have a bit of cash in two others. I do sometimes try to time when I convert currencies but overall they don't swing enough to make it a big deal.
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I wouldn't say I invest but at this price I am accumulating Swiss Francs. We travel there frequently so having a cache of them can soften the blow of any large currency moves.
We buy them at Fidelity. They charge 1% to buy/sell and no fees to hold them in your account.
So if I know my hotel costs 1,000 CHF and I wont have to pay the cost until our trip in six months I can purchase 1000 CHF now. At par lets say the cost to me is $1,010. If in 6 months the currency CHF spikes by 10% when I pay the bill it will cost me $1,100. I'll then sell my 1,000 CHF for $1,089. The 2% commission I more than get back on my credit card that gives me 3% for hotels.
If the Swiss Franc falls when it comes time to pay for the hotel I'll likely just keep the Francs for a future trip.
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I'd say if you are invested in international stocks, you are essentially exposed to the currencies those companies earn. That is because the earnings of those companies flow back to you in one way or another (dividends, buybacks, debt paydown, or reinvestment) and that value is then converted to dollars through dividend conversions and market pricing. If, for example, the dollar last half its value compared to the yen, then the earnings of your Japanese company would be converted into twice as many dollars. Their buybacks, dividends, reinvestment, and debt reduction would all be worth twice as many dollars than before. Of course, the reverse is also true.
This is only the case if you have a purely domestic Japanese company in your hypothetical. If, say, you try and replicate a Yen exposure strategy by buying stock in Toyota, you're going to have the stock results from the world market, not the Japanese one. Same thing if you go to Switzerland to diversify by buying Nestle--all their earnings are outside Switzerland, so they have to change their foreign currency into CHF before reporting.
Here's one example that I find particularly interesting: Naspers is a South African company that invested $32million USD in the Chinese internet company Tencent back in 2001 in exchange for 48% of the company. Tencent has now grown into a $500 billion company and through dilution, Naspers stake is now 31%. BUT: Naspers market cap is $115b (or so), not the $155b it should be. There is a huge discount here. On paper, for Naspers it's all in South African Rand, but in reality, Tencent's earnings are in Chinese Yuan. At the end of the day it's a wash, currency-wise.