Allen Ostrofe: How to Manage Currency Risk in Your Financial Portfolio



Mary and Ryan called recently from Kamas, Utah. They are both in their early 60s, have small portfolios, are nearing retirement, and have successfully split their long-term investment savings between securities and real estate.

They have shown confidence in how their prospects for our economy relate to their investment growth targets. During a recent review of the assets in their securities portfolio, they became concerned about recent press articles about the fluctuation of the dollar, yuan, yen, euro, etc., and wondered how that might affect their nest egg.

Should they act now to protect the value of their investments?

Simplistically, it can be cheaper for Mary and Ryan to travel internationally when the dollar goes up. However, it could be a bad thing for US manufacturers when the dollar goes up. This makes their goods and services more expensive abroad and gives a potential competitive advantage to foreign companies. The value of Mary and Ryan’s investments could also be significantly affected by changes in global exchange rates. All investors should appreciate the influence that the forex market has on their securities portfolios, and their level of currency exposure, even if the investments appear to be in US companies. For example, XYZ, Inc. sells products and services in the United States for US dollars, France for euros, India for rupees, Japan for yen, and China for yuan. After receiving such foreign currency, XYZ, Inc. converts the currency back to US dollars. Changing exchange rates influence the revenue that XYZ, Inc. receives. In turn, Mary and Ryan’s investments are affected by this activity. This exposure to currencies presents them with both a currency risk and a transaction risk.

In recent years, the dollar had gotten stronger and stronger, while the Chinese allowed their yuan to weaken. For foreigners, it makes buying Chinese products more attractive and makes buying American products more expensive. This puts financial pressure on US manufacturers, farmers, and service providers, and potentially reduces our exports and the value of US stocks. Some argue that now is the time to reduce the value of the US dollar to attract more foreign buyers of our products. Mary and Ryan would be well advised to pay attention to potential changes in currency valuations, as this could certainly impact the return on their investments. Here are some steps they could take right now, depending on their particular situation:

There are three general correlations between stock price performance and exchange rate movements: zero correlation, negative correlation, and positive correlation. Ask your Certified Financial Planner (CFP) to identify which parts of your investments have a positive or negative correlation with the rise or fall of the dollar.

If you want to get exposure to foreign companies, but don’t want currency fluctuations to impact your return, the cheapest and easiest way to eliminate currency risk may be to buy International exchange-traded funds (ETFs) that are hedged against foreign currencies.

If you think the dollar is going to weaken and a foreign currency is going to get stronger (for example, the Japanese yen), you can buy a leveraged currency focused ETF that takes advantage of a Japanese yen that is falling. strengthens.

Empirical evidence supports the idea that multinational stocks of US shareholders win when the dollar loses.

There is simply no doubt about the benefits of holding foreign securities in your portfolio. After all, modern portfolio theory has established that global markets do not always move at the same rate and that by mixing asset classes that are weakly correlated to each other in a tactical allocation, risk can be reduced to the level of the wallet.

Mary and Ryan now understand the risk associated with foreign currencies and have reallocated their international holdings with a plan. In the meantime, with a relatively strong dollar, they are going on vacation!

The opinions expressed in this document are for general information only and are not intended to provide specific advice or recommendations to an individual.

Any investment involves risk, including loss of capital. No strategy ensures success or protects against loss. There can be no assurance that the techniques and strategies discussed are suitable for all investors or will produce positive results.

Allen Ostrofe, MBA, CFP, is Chairman Emeritus of Ostrofe Financial Consultants, Inc., with clients in 32 states and is a registered representative with, and securities offered by LPL Financial, a FINRA / SIPC member. Investment advice provided by Ostrofe Financial Consultants, Inc., a registered investment adviser and a separate entity from LPL Financial. For questions or suggestions, visit Branch Address: 420 Sierra College Drive, Suite 200, Grass Valley.



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