Safety in Global Currencieson Wednesday, 14 November 2012. Posted in Economic Commentary, Investments
Preparing for the Unexpected
This article was originally posted on Caterer Goodman’s online blog China Expat Money.
Living overseas has given me a new perspective on life and investing. No longer do I live in a measly 1 million population of St. Louis but Shanghai which has 22 million plus people crowded in here. It is a truly global city where I meet people from almost every continent. What I want to get at is that they all think in a different currency. When they pay 35 RMB for a Starbucks coffee they ask themselves, “How much is this in Riel, Rupees or Aussie dollar?” Personally, I’d be happy if my portfolio was even half as diversified as Shanghai’s population is. Having investments in different currencies isn’t always the first thing that comes to mind when building a portfolio, but maybe it should. There are various benefits on why we like to do this.
Things to consider:
Before making a large investment you should know when you will need access to that money. For example: if you are an Aussie living in Shanghai but moving back to Australia in 3 years it may not be wise to lock up your money in an European property fund. If the AUD continues to rise and when 3 years comes around when you need the money you can get hit hard on the currency exchange. This is why it’s a must to have liquidity and safeguards against the unexpected.
If you invest in a quality investment in an undervalued currency then it is possible to make a good return on the currency exchange + the underlying investment itself. On the other hand, if you invest in Europe in a great investment you may lose much of your gains just because the Euro is losing value.
The point of diversifying is to reduce risk and give stability to a portfolio. That way a winning investment can make up for a losing position and as long as you make smart choices you should be able to grow the portfolio consistently. Having a portfolio of global investments adds a layer of safety that some may not consider.
How to do it? What investments?
Seeing how volatile the markets have been in recent years it makes it hard to rely on consistent returns. Holding investments that are uncorrelated to the markets make a big difference as you still make money even with the Fiscal Cliff or a Euro disaster coming. Example of uncorrelated investments could be certain commodities, real estate and others.
The point of this article is to make you aware of the currency you are investing in and what is happening with it. I don’t want you to go out and buy the Euro or Thai Baht just because it looks cheap historically but learn to make educated decisions and look farther in the future. It is very hard to predict currency movements so the best you can do is prepare for the worst. Also, knowing where you will live in 3/5/10 years time is important as you can plan accordingly. Even if you don’t know, having a balanced portfolio with liquidity will allow you to adjust quickly to changes in your life.