How do foreign currency fluctuations affect my investments?
Question:
In recent times, there have been strong fluctuations in the different overseas currencies ($, ₤, €) relative to each other, and also relative to the Israeli Shekel. Should this concern me regarding my overseas investments?
Concerned Investor
Sent (September 1, 2007)
Answer:
By: ACL
Dear Concerned Investor,
As you are no doubt aware, diversifying an investment portfolio into a variety of foreign markets is a cornerstone of investing success, as exposing one’s portfolio to potential gains in one market can help offset potential losses in another. However, the currency in which your investment holdings are denominated can have a significant impact on the portfolio returns.
You would need to consider the following points when making decisions about currency allocations within your investment portfolio:
- Do you want to restrict yourself to your home currency, or rather to expose yourself to the potential benefits of diversifying into other currencies?
- In what currency will your future liabilities be denominated? For example, many Israeli retirement homes quote their charges in US dollars. This is also the case of wedding arrangements, or prices of residential apartments in Israel, which are quoted in US dollars. In such a case, it would be appropriate for one’s investments to be denominated in US dollars, despite the fact that there may be exchange rate movements over time.
- What is the nature of other investments which you own? In what currencies are they denominated in?
- What is your investment time horizon? Because exchange rates tend to be highly volatile in the short term, one would need to take a more long-term view in this regard.
I generally suggest to clients to take a long-term view, and keep their investment portfolios well diversified amongst the main international currencies, and therefore not to be disturbed by the movements throughout the investment lifespan. If the original asset & currency allocations were well thought out, and accurately made, they will provide overall stability to one’s investment portfolio.