Why Currency is The Most Important Consideration when Investing Globally
When trying to diversify (lower volatility) your portfolio, your best friend is to have assets with lower correlation. You have probably heard that you should ignore currency considerations because in the long run it all balances out. While the chart below shows that is true, there are periods as long as a decade or more where currencies were trending. When it is trending in your favour, it’s all good, but when it trends against you, it can wipe out your equity returns.
Our first chart today shows the correlation between the German DAX and the S&P 500 since 1975. The middle chart shows the price ratio between the two indexes. The bottom line shows the USD versus EUR currency. Prior to 1999, the synthetic euro or mostly deutschmark.
The table below shows the correlation between currency returns is about 44 per cent over the past 20 years. Having such a low correlation means currencies can help lower the volatility in our portfolios.
The bottom line is simple. When investing globally, currency should be your most important consideration. It should be considered a separate asset class. If you are picking individual stocks, you cannot hedge adverse currency moves and you cannot benefit from this added source of diversification. ETFs allow us to take positions in global markets on a hedged or non-hedged basis and can be a significant benefit to lowering the risk and enhancing the returns in your portfolio.
Watch this segment online at BNN.ca here: http://www.bnn.ca/larry-berman-why-currency-considerations-are-the-most-important-part-of-global-investing-1.573914