Exchange Rates
More powerful than you could possibly imagine
A friend of mine keeps obsessing about exchange rates, and how they impact his portfolio. At first I didn't really pay attention to him, but he's right.
Even if you are not playing in the forex sandpit (I'm not), as long as you have assets denominated in foreign currencies you will have to deal with the consequences of exchange rate movements.
There are three main factors:
- the currency you earn in
- the currency you save/invest in
- the currency you will need in the future
If all three of them are the same currency then congratulations, you don't have any currency risk and can stop reading this post. Enjoy the rest of your day ;)
Still with us?
Let's look at me. I earn money in yen, invest in yen and dollars/pounds, and will probably need yen in the future (I think there is a good chance I will stay here in Japan).
In my case there is a further complication in that I like to take trips abroad and may decide I want to live somewhere else in the future. This means that I will need both yen (for my life in Japan) and other currencies (for my trips abroad and if I decide to move to a different country).
The yen is very strong right now. The pound is weak, and uncertainty about a possible UK exit from the EU is making it weaker still.
I believe the yen will be weaker in the future, and the pound stronger. Because of this it might make sense for me to save/invest in pounds right now.
For me the currency situation is as follows:
The last few years have seen the yen strengthen, so it has felt like our saving and investing has been for nothing. I think this will turn around, but even if it doesn't it isn't the end of the world as our income is enough to support us.
Investing in other currencies protects us from the 'bad scenario' of wanting to leave Japan and not having enough money (with a weak yen) to do so. For me, that particular scenario is worse than the other bad scenario of living in Japan with less purchasing power from investments.
What do you think? Do you have a plan do deal with currency fluctuations? What do you think will happen in the future?
This post first ran on RetireJapan in June 2016
Isn't that part of the attraction of crypto? You don't have to decide, you just have to be in the right coin, ahem BTC.
Heh, indeed. At least at the moment :)
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I moved to Australia in 2000 when the AUDUSD was 0.49. I have not been working in Australia since 2005 - so I have not been earning AUD. I spend most of my money in AUD and I do aim to do one overseas trip a year. Most of my assets apart from my house are held outside Australia.
AUDUSD went to 1.10 at its peak in the resources boom. I remember one year my fund manager made 18% measured in USD and my portfolio lost as AUD appreciated 25%
I now plan for that. I hold 2 years worth of cash in AUD to cover spending. I invest quite a bit in overseas ETF's on the Australian stock exchange. That hedges some of the capital risk.
Most important is my long view on AUD - if I think it is going to appreciate I start to move capital back to AUD - say 4 or 5 years of spending.
I invest all across the globe, including in Japan. My long view on Yen was it will weaken. So I borrowed Yen for my Yen stocks (called a carry trade) and paid most of it back when Yen was weak - that way my Yen gains on yen stocks is hedged.
Crypto is proving though to to be a better hedge as its returns are uncorrelated with other markets.
I believe the yen will be weaker in the future, but if it is stronger we still win as we earn in yen. If it weakens we win as most of our assets are in USD.
Don't have any crypto yet (apart from Steem) :)
the yen was the strongest around 5 years ago and since then became weaker and weaker due to Abenomics and the flooding of the market with new money.
I'm hoping it will be strong(er) for the next ten years or so, then weaker after that :)
Ok. I hope so too it will finally become stronger again.
But don't write it became stronger when it actually became weaker. Now it's not a good time to sell yen
Oh, I don't do Forex.
And I came to Japan in 2000, so my baseline is probably a bit different (yen was 146 to the dollar just before I came). 110 seems relatively strong to me. Hoping to see 200 again in my lifetime :D