Currency and the Impact on your Portfolio

From my experience I have found that many investors (albeit retail) are often unaware of the impact currency movements can have on their portfolio, so I thought I would write a quick post highlighting just this...

When investing in foreign assets, be it debt, equity or commodities, not only are we subject to underlying price movements but also currency movements between our base currency and the foreign assets currency. Lets consider what happens when we buy a US equity fund. We hand over sterling, which is converted into US Dollars and then used to purchase the equities. When we redeem, we sell equities in US Dollars, convert this back into sterling and withdraw our cash. So if the US Dollar strengthens against sterling over the period we 'win' and if it weakens 'we lose'. It's just something one should to be aware of, particularly when many developed nations are actively trying to devalue their currencies.

So you may find the current weakness of Sterling frustrating when travelling abroad, but if like me you are holding foreign equities it can provide a nice kicker to portfolios! Beware, currencies can move quickly in both directions. It is possible to hedge out currency risk by purchasing a hedged share classes when investing in funds, or you could look to add currency trades into portfolios, but these can be costly and difficult to implement. For now let's just enjoy the ride...