4

I live in a country that has over the last year gone through some serious currency volatility based on political/economic uncertainty. I made a decision towards the end of last year to move a decent portion of my net worth allocation offshore (cash & investments) as a hedge against local conditions getting worse (there was a definite possibility of this happening given expected US interest rate hikes and poor local conditions).

As it turns out, this year has thrown a lot of curveballs....US rate hikes haven't materialised as expected, Brexit happened and the the global search for yield (with many markets having negative yields) has lead my currency to start appreciating again.

Now I'm left watching my currency appreciate while my foreign investments start getting hammered. I understand they are there to act as a hedge and I want to do the responsible thing and not panic, but I fear I moved my asset allocation while my local currency was at one of its weakest..but how was I to know back then, right?

I've made many mistakes in the past by panicking, rushing or trying to time things only to make it worse...now my gut is telling me to ride this out, rely on dollar cost averaging over the long run and just keep my asset allocation in check....if my currency gets even stronger it allows me to buy more offshore...so hopefully averaging out.

Recommendations? Thanks.

  • We can't predict the future. Do your research and apply your best judgement; that's what you did to get into this investment. – keshlam Aug 1 '16 at 12:28
0

Consider that currency fluctuation in your own country is already partially hedged by the fact that you buy goods in your home currency. ie: If the Euro drops in value relative to the USD, that will greatly impact your ability to buy American goods, but will have less of an impact on your ability to buy European goods.

So by putting your money in an offshore currency, in my opinion you have added risk to your finances, not reduced it. If a weakening of your home currency relative to the USD correlates very highly with local inflation in your country, then this currency risk may partially offset your inherent inflation risk (thus, hedging it, as you said). However, this is not something you can simply assume to be true.

For a real-world example:

On Dec 31, 2012, 1 USD was worth about 1 CAD. On Dec 31, 2015, 1 USD was worth about 1.40 CAD. That's a 40% weakening of the CAD relative to the USD, over a time span of 3 years.

Over the same time period, according to http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46a-eng.htm, Canada's Consumer Price Index (measuring the cost in Canadian dollars to buy a similar basket of goods to what could have been bought in 2002) moved from about 122 to about 127. That's about a 5% weakening of the CAD, in real local purchasing power.

If someone in 2012 had sold some CAD to purchase USD, by 2015 they would have gained 40% in CAD value (ignoring investment returns, which could have been earned whether the money was in CAD or USD). That increase in CAD value per USD is not greatly correlated with the decrease in local CAD purchasing power, of 4%. If this were a well-correlated relationship, we could expect inflation in Canada over that period to hit about 40% (offsetting the increase in value of USD over that period.

How this applies to you

As @Keshlam notes in your comment, what you have done here is an investment (and potentially a very risky one) - it is not something you can just assume is a hedge. If it was a proper hedge, the strengthening of your home currency (and thus, weakening of your USD investments) would have been offset somewhat by deflation in your home currency. That is, maybe you bought $1 USD for every 10 units of your home currency ("HC"), and now if you sold $1 USD, you would only get 8 HC: if this were a hedge, 8 HC would today buy you about as much as 10 HC when you made originally bought the USD. I very much doubt this is the case, and it highlights that your investment is adding risk to your portfolio, not necessarily reducing it.

What you should do

This is something only you can decide. However if your goal is to create a low-risk portfolio, this appears to be a poor way to do it.

It is tempting to think ("I bought high, so I can't sell low - I need to at least wait until it reaches my original cost") but this is not very logical thinking. What the price was, doesn't tell you where the price will be. This applies to any investment - you think you're in a trough, so you should wait for a peak, but your trough could continue to bottom out, without every climbing back. Don't let regret over past performance blind you to what you plan on doing for the future.

  • 1/2: Thanks for the detailed answer. I still have a LOT to learn about investing and in particular hedging. I should've added some additional points: a) I'm considering a move overseas at some point, hence my decision to also slowly start moving my capital offshore; b) I agree that hedging was probably the wrong word, in fact fear is probably a better one...our currency has wildly fluctuated over the past year because of serious uncertainty...and nobody knows where it could go, so capital preservation probably describes it better. I think there is every chance it goes back up to the highs – ZASC Aug 3 '16 at 7:06
  • 2/2: and beyond, but also a chance of recovering, especially based on the political scene. So I'm really uncertain of how to manage this. A part of me thinks to just stick it out and if things really do get worse locally, at least I've moved some offshore. If locally it improves, well then it's something that didn't work out...my biggest concern now is panicking, making a call based on the now and reversing the investment only the find things actually keep getting worse. I know nobody can answer this, but I was looking for some general advice on how to manage this kind of situation. Thanks. – ZASC Aug 3 '16 at 7:09
  • @ZASC When you say you're moving overseas, do you know which country? If for example you were planning on moving to the US, then increasing your USD savings now may make sense - and you would actually then be 'hedging' the value of your savings against American inflation. Besides all of that, whether you move or not, what you are doing is diversifying your portfolio, and diversification is one way to reduce risk. I just provided this answer to highlight that your home currency by default is somewhat naturally hedged against your future cost of living in your home country. – Grade 'Eh' Bacon Aug 3 '16 at 13:05
  • Thanks...I really do appreciate the feedback. There is a very good chance I'll be moving to the US or the UK next year, so that is the reason I started moving some capital offshore (USD & GBP). Agreed, I think diversification is the term I should've used...I was afraid that with local conditions worsening my capital would diminish in global terms when I decided to move. I'm going to look at this as part of a longer term plan of portfolio allocation and dollar cost average....if my local currency ends up improving, it means I get to buy more USD, so will average out. Cheers. – ZASC Aug 4 '16 at 5:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.