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Currency Risk Can Be Good

Among wise index investors (is that too repetitive?) the common view of currency fluctuations with regards to international investments is that it’s a potential risk but it’s a very minimal risk over the long term since they tend to cancel out. So we conclude that we can tolerate it and it might even help with rebalancing. But is currency risk actually a good thing for investors? It is possible.

The point is made very neatly in The New Pension Strategy For Canadians where the author points out that investors in Canada tend to pay their bills in Canadian dollars, and therefore investments denominated in Canadian dollars have the least risk. However when we go out and buy something, it’s typically from a store that imported it from another country. So our expenses, or in other words our inflation, are vulnerable to changes in exchange rates. If the Canadian dollar falls we expect that we’ll have to pay more for every day expenses. If the Canadian dollar rises in value… hahaha you didn’t really think retailers would pass that on did you?

One of the advantages of investing in foreign countries is that the currency risk in the investment will mirror the costs of importing goods and services. A falling Canadian dollar would mean that buying gets more expensive in CAD, but getting dividends from an ETF like VTI would pay you correspondingly more.

Based on this the ideal investment strategy would be not to move all your investments back to domestic assets as you get older, but to allocate them according to the countries where your spending money ends up (or maybe not, if you like Aegean cruises). Unfortunately this is hard to predict in the distant future. For now it’s best to accept currency volatility. When you have a better idea of what your retirement will look like you can start to take advantage of it.

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