When you see the word “currency”, what do you think of? To me, it’s a reminder of vacations abroad, different colored bills (with faces I didn’t recognize) that wouldn’t fit in my wallet, the weight of change that they wouldn’t accept at the kiosk when I re-entered the U.S., and finally wondering why I didn’t just use plastic.
But my colleague Jane Leung has been encouraging me to think about why currency is going to continue to be an important factor in my investment choices, particularly as the dollar strengthens. And it’s a message I think will resonate with my millennial readers. Jane just moved back to the U.S. after spending seven years in our Hong Kong office; the jars of change she accumulated during countless trips throughout Asia now sit in a box marked “souvenirs”. She tells me that here in the States, global currency is a bit of an afterthought, if a consideration at all, unless we’re packing our bags for a vacation. In Asia, it’s a different story, as the region is full of different currencies, from Japan’s yen to Indonesia’s rupiah. But there’s so much more to it than globetrotting.
Q: Jane, what is something you wish more people knew about currency as it relates to investing?
A: In my days as a portfolio manager, the focus was how always on risk and reward. Today, nearly everyone has global exposure their portfolio, whether it’s through investment vehicles like exchange traded funds (ETFs) or simply investing in an American company whose products are entirely manufactured overseas. The news is filled with stories of opportunity and growth abroad and people want to be a part of it. The economy becomes more global by the minute, and investors, from millennials to baby boomers, need to pay closer attention to what they own.
Q: We have heard that the dollar is rising against currencies like the yen and the euro. What exactly does this mean?
A: It’s funny, because in past months, I recall many of our friends in Asia planning trips to Japan specifically to take advantage of a devalued yen, planning to get their holiday gifts – and take a vacation – at a discount. Instead of thinking about it in technical terms, basically the point is that when your own currency is “stronger”, you can buy more goods of the “weaker” currency, i.e. you can create a shopping list and go on a spree while on vacation! Actually, I think that building a shopping list is a lot like building a portfolio. There are core things you know you always need, things you buy when you have specific and targeted need, and the occasional next-new-hot-product impulse buy. Getting back to currency though, the key thing to focus on is this: When the dollar is relatively stronger than the yen, euro or another currency, the items that we import here in the U.S. become cheaper, while the items we export overseas become more expensive in those markets. When it comes to your overseas investments denominated in weaker foreign currencies, your returns will be reduced when you convert them back into dollars.
Q: Losing money on your returns doesn’t sound good. Is there anything an investor can do to lessen the impact?
A: There’s a strategy you might have heard of called “currency hedging”. The idea is to attempt to decrease the risk of the U.S. dollar strengthening while staying invested in potential growth opportunities and overseas markets. By using the currency hedged approach, you can also keep a bullish view on the U.S. dollar relative to other currencies. The fact of the matter is that the dollar has been (and will likely continue to be) strong for some time and, as such, you do need to consider currency risk if you are investing overseas.