The strong dollar
is much in the news lately. But most Americans, other than tourists beyond our
shores, don’t focus on what that means to them. For U.S. investors, the upshot
is not great. In fact, for most, currency fluctuations worldwide (and not just
that of the dollar) are an invisible force that they don’t reckon with until
it’s too late.
Calculating
currency valuations from one country to another is complex and, if you’re like
most people, you don’t give the subject much thought until you get ready to
travel. You might visit your bank to swap greenbacks for a few euros, but
usually, you just plan to use a credit card to cover your tab on the Spanish
Rivera or at the Tuscan villa.
For corporations
and for your portfolio, though, fluctuating currency rates carry much more
weight.
A Stronger Dollar?
So what? Maybe you
never plan to go to Europe. Your portfolio, likely containing international
investments in its mutual funds, might still feel the fallout.
Let’s look at one past
global monetary event back in 2015 when Switzerland reaffirmed the commitment
to keep its franc at $1.20 to the European Union’s euro – then suddenly changed
its position, sending the euro falling, the franc soaring and world markets
reeling.
For one, German
businesses suddenly found it much more expensive to buy Swiss watches,
chocolates and cheese as Switzerland’s exporters were caught in a battle
literally overnight. Meanwhile, Swiss citizens enjoyed welcome wealth.
Unlike Americans
who may plan only an occasional trip to Paris, Swiss citizens commonly drive to
France for the day. The currency move suddenly put an extra 15% to 20% of
buying power into the hands of the Swiss who visit France.
Global Markets
We live in a global
society, so understanding currency fluctuation means much more than calculating
our travel costs and daily vacation spending. Exporters win or lose every time
currency valuations change.
Keep in mind if the
euro declines substantially against the U.S. dollar, for example, that the new
Mercedes is more affordable here but Apple iPhones cost much more in Germany
than in this country.
Don’t feel too flush
with the dollar’s comparative value. Nearly half the earnings in the Standard
& Poor’s 500 come from companies based outside the U.S. Slowdown in global
growth also dims outlooks for robust domestic growth as economists cite
troubled overseas markets, volatile oil prices, and, ironically, a stronger
dollar.
International Investing
For most of us,
international investing, whether overt or hidden in our mutual funds, comes
with pros and cons:
Pros: Variation in the ups and downs of the world’s
markets means your diversification enjoys a chance to work better. Mixing asset
classes with low correlation to one another usually guards against
portfolio-wide losses – and you won’t find lower correlation anywhere than
across some pairings of global stock markets and indexes.
Cons: For the risks in international investing,
look no further than headline political turmoil, border wars and other
upheavals that send shock waves through almost all the world’s markets. Less
grandiose but no less devastating: Exchange rate risk if your money must be
converted before you can invest.
Like all financial
decisions, such as investing and retirement planning, the further out you plan
your trip, the more successful your journey.
Remember to add the
world’s currencies to your budgeting and investing discussions.
