Comments on: Reader Question: Rebalancing and Currency Exposure http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/ Helping you invest and prosper Sun, 12 Feb 2012 00:54:40 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Investoid » Blog Archive » The Effect of a Strong CAD on Investing http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-41058 Investoid » Blog Archive » The Effect of a Strong CAD on Investing Thu, 31 May 2007 23:03:14 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-41058 [...] debate as to whether you should think about currency fluctuations if you have a long term view (see this Canadian Capitalist post for instance). While I think it’s hard to determine where the currency rate will be in the far future, I [...] [...] debate as to whether you should think about currency fluctuations if you have a long term view (see this Canadian Capitalist post for instance). While I think it’s hard to determine where the currency rate will be in the far future, I [...]

]]> By: alvanson http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-21439 alvanson Thu, 22 Feb 2007 15:49:26 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-21439 Since the currency fluctuations tend to wash over time, currency risk yields no net benefit to a long-term investor. As well, there are no long-term growth prospects in investing in foreign currencies. Assuming a 10% average return, a 0.15% per annum cost to hedge, and a 45 year investment horizon, a $1000 portfolio would become Unhedged: $72 890 Hedged: $68 550 Difference: $4 340 The hedged portfolio is worth about 6% less than the unhedged portfolio. Given the volatility of exchange rates, the unhedged portfolio's 6% advantage could be quickly lost to a strengthening local currency. As the cost of hedging is minimal and the growth prospects of holding foreign currency are non-existent, I would suggest holding currency neutral investments. Since the currency fluctuations tend to wash over time, currency risk yields no net benefit to a long-term investor. As well, there are no long-term growth prospects in investing in foreign currencies. Assuming a 10% average return, a 0.15% per annum cost to hedge, and a 45 year investment horizon, a $1000 portfolio would become

Unhedged: $72 890
Hedged: $68 550
Difference: $4 340

The hedged portfolio is worth about 6% less than the unhedged portfolio. Given the volatility of exchange rates, the unhedged portfolio’s 6% advantage could be quickly lost to a strengthening local currency.

As the cost of hedging is minimal and the growth prospects of holding foreign currency are non-existent, I would suggest holding currency neutral investments.

]]> By: Outroupistache http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-21394 Outroupistache Thu, 22 Feb 2007 11:48:51 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-21394 I agree that for Canadians planning to spend their money in Canada, one wants to measure and to rebalance things in C$. There is a vehicle to get the gains from foreign equity diversification that washes out currency fluctuations, at a reasonable cost in my view, in the form of iShares ETF funds XSP (S&P500) and XIN (MSCI EAFE). Given the observed large and often quick currency changes it's worth the management fees and the tracking error those funds entail. I agree that for Canadians planning to spend their money in Canada, one wants to measure and to rebalance things in C$. There is a vehicle to get the gains from foreign equity diversification that washes out currency fluctuations, at a reasonable cost in my view, in the form of iShares ETF funds XSP (S&P500) and XIN (MSCI EAFE). Given the observed large and often quick currency changes it’s worth the management fees and the tracking error those funds entail.

]]> By: Middle Class Millionaire http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-21325 Middle Class Millionaire Wed, 21 Feb 2007 15:35:49 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-21325 I agree. As an individual investor I think there is very little gain in trying to either hedge currency (because of cost) or predict it (because no one can do it accurately). I think that instead it's important to limit the percent of your portfolio (based on risk) that's exposed to international currencies. Although international currency exposure provides some diversity to a portfolio you will ultimately be retiring in the dollars of your country. MCM, http://middleclassmillionaire.blogspot.com/ I agree. As an individual investor I think there is very little gain in trying to either hedge currency (because of cost) or predict it (because no one can do it accurately). I think that instead it’s important to limit the percent of your portfolio (based on risk) that’s exposed to international currencies. Although international currency exposure provides some diversity to a portfolio you will ultimately be retiring in the dollars of your country.

MCM,
http://middleclassmillionaire.blogspot.com/

]]> By: Investoid http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-21324 Investoid Wed, 21 Feb 2007 15:20:10 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-21324 CrunchMoney - I don't think it's fair to say that historical currency fluctuations wash over time. For instance, look at rolling 10 and 20 year average percentage change in USD/CAD exchange rates from 1971 (the year after Canada floated its currency again) to 2006. Using the monthly average exchange rate, the average 10 and 20 year change was 9.35% and 15.21% respectively. Not only that, the standard deviation on these averages was 13 and 14 percentage respectively (I used data available from <a href="http://fx.sauder.ubc.ca/data.html" rel="nofollow">UBC</a>). I think it's important to be aware of this long currency risk, but that doesn't necessarily mean you should do anything to hedge against this risk. I like the Capitalist's idea to take the current exchange rate when rebalancing, and not attempt to predict where the rate is going to go. CrunchMoney – I don’t think it’s fair to say that historical currency fluctuations wash over time. For instance, look at rolling 10 and 20 year average percentage change in USD/CAD exchange rates from 1971 (the year after Canada floated its currency again) to 2006.

Using the monthly average exchange rate, the average 10 and 20 year change was 9.35% and 15.21% respectively. Not only that, the standard deviation on these averages was 13 and 14 percentage respectively (I used data available from UBC).

I think it’s important to be aware of this long currency risk, but that doesn’t necessarily mean you should do anything to hedge against this risk. I like the Capitalist’s idea to take the current exchange rate when rebalancing, and not attempt to predict where the rate is going to go.

]]> By: CrunchMoney Editor http://www.canadiancapitalist.com/reader-question-rebalancing-and-currency-exposure/#comment-21274 CrunchMoney Editor Wed, 21 Feb 2007 06:55:26 +0000 http://www.canadiancapitalist.com/2007/02/21/reader-question-rebalancing-and-currency-exposure#comment-21274 If you look at historical currency fluctuations, they tend to wash over time. If you are invested for the long term (10+ years), I agree, I would ignore currency fluctuations. Hedging currency is a net cost to a portfolio and predicting them is impossible. Hedging currency has become a hot debate among Canadian investment managers because their US returns have suffered due to the rise of the Canadian dollar over the past several years. If you look at historical currency fluctuations, they tend to wash over time. If you are invested for the long term (10+ years), I agree, I would ignore currency fluctuations. Hedging currency is a net cost to a portfolio and predicting them is impossible. Hedging currency has become a hot debate among Canadian investment managers because their US returns have suffered due to the rise of the Canadian dollar over the past several years.

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