The forex factor of investing
“But, if the Aussie dollar appreciates, your return on your US$100 return will decrease as you convert your investment back into local currency,” he adds.
In particular, investors can manage the currency risks in their portfolio by checking whether their investments include an integrated currency hedge. For example, some investments are hedged, which means that returns or losses on assets will not be affected by currency fluctuations. Other investments will not be hedged, which means that their returns may be affected positively or negatively by currency fluctuations.
Foley says, “When a portfolio is hedged, the investment manager uses certain financial instruments to eliminate the effect of currency fluctuations on key investment assets. If your wallet has these characteristics, the next step is to check how it is done and the cost. »
Alternatively, you can choose to deliberately expose yourself to currency risk, i.e. when the portfolio is unhedged. In the example above, if the value of the Australian dollar is higher than the value of the US dollar, which is rare and unlikely to be sustained over the long term, an investor can choose to fully expose their investments to fluctuations in the currencies. expecting a falling Australian dollar to boost investment returns by US$100.
Diversification is another way for investors to manage currency risk. Diversifying an investment portfolio involves investing in a number of different asset classes to minimize the risks of market ups and downs.
“That could mean investing in stocks, bonds, ETFs, real estate, cryptocurrencies and even gold. Instead of rolling the dice on one type of asset and risking losing money ‘money due to a fluctuation in exchange rates, holding foreign investment can act as a hedge in the event of a crash in the Australian economy,’ says Gerry Incollingo, chief executive of financial advisory firm LCI The Partners.
Wealth management and currency trading require good planning and strategy. So make sure you understand why you are investing and make sure you always take a disciplined approach, taking into account variables such as currency fluctuations over time.