Rising Dollar, Falling Dollar… Don’t Pull Down Your Hedge

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Love thy neighbor — but don’t pull down your hedge.

Benjamin Franklin

Yesterday I answered the million dollar question. Today I’ll address another question we receive regularly in our Daily Reckoning reader mail. ‘As an Australian, why should you invest some of your money overseas?’

It’s a good question. And there are a lot of good answers. I’ll focus on one of those answers today. But first let’s look at how the Australian dollar is holding up.

This morning it’s trading for 93.9 US cents. It hasn’t managed to regain parity since dropping below one US dollar in May 2013. Since then it’s been trading between 87-97 US cents. That’s reasonably low volatility when you look at some of the leaps and falls it’s taken in the past. Yet it’s still a variance of more than 10%.

For some bigger shifts, have a look back to mid-July of 2008, when the Aussie dollar was trading at 97 US cents. By the end of October it had plummeted to 62 cents. That’s a decline of over 34%, relative to the US dollar, in three months’ time. Fast forward to 30 July 2011 and the Aussie was worth nearly US$1.10. That’s up 77% from its lows less than three years earlier.

Why am I telling you this? It all has to do with today’s question. ‘Why should you invest some of your money overseas?’ Taking the dates from above as an example, if you’d invested AU$10,000 in Ford Motor Company in July 2008, you would have received US$9,700 worth of shares. Less than four months later those same shares, exchanged back into Australian dollars, would be worth AU$15,645 — assuming Ford’s share price remained unchanged.

Of course, this can also work against you if the Aussie gains in value against the US dollar. That’s one of the reasons why, just as you want to diversify your portfolio within Australia, you also want to spread your overseas investments into various currencies, like the yen, euro, and yuan. These currencies will all fluctuate against the Aussie over time, but generally not in lockstep with movements against the US greenback.

You might have heard this called hedging. Which is, incidentally, why I threw in the quote from Ben Franklin up top. He wasn’t actually referring to investing here. But I like the quote…and it does kind of work here.

Founding Fathers and neighbours aside, hedging, or spreading your investments across a number of different currencies, not only lessens your risk, it allows you to make the most from a bad situation.

Now please don’t mistake this for currency trading. Speculating on currency futures is like trying to predict where a feather will get blown by a hurricane. It’s anyone’s guess. At the moment, the Aussie seems fairly content trading in the mid 90 US cent range. And that’s despite the best jawboning efforts by Reserve Bank of Australia Governor Glenn Stevens. He’d like to see the ‘stubbornly high’ Aussie dollar fall in value. He has his own reasons for that. I’m not so sure.

If the Aussie drops against, say the yuan, it will make Australian property cheaper for Chinese investors. But it won’t be any cheaper for you or me. What will that mean? Higher house prices. And Australia already has an average house price of 4.3 times annual incomes, the third highest ratio in the world.

Personal opinions aside, history shows us that the Aussie dollar will continue to vary relative to foreign currencies. And to limit the risk to your overall portfolio, you need to look at investing some of your hard earned savings overseas.

Of course, there are other reasons to invest abroad. But I’m out of time and space for today.

Dan Denning will be writing to you tomorrow. He’ll introduce you to the Guild’s international board and share some history on Agora, our global network. I’ll be back with you Thursday for a Q&A session with Meagan Evans.

If you have any questions or suggestions on this new project, send them to cs@portphillippublishing.com.au with the subject line ‘Albert Park Investors Guild’.

Regards,

Bernd Struben
Chairman, Albert Park Investors Guild

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Bernd Struben

Bernd Struben

Bernd Struben is the Managing Editor of Port Phillip Publishing. Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.
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