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Currency Hedged Investments

A couple of my friends have taken out large sums of cash and invested it overseas due to high advertised interest rates. In one country the interest rate was advertised at 20% and in the other it was close to 10%. Currency hedged investments have a several layers of risk which need to be considered.

In this post I’ll also discuss how currency exchange rates can affect any geo-arbitrage decisions.

 

High Interest Rate Promises

There are numerous tricks that such companies use to get you a shitty return in the end and maybe even a loss. You aren’t just dealing with the investment but you are also dealing with foreign exchange rate.

Both of the countries above were developed nations which most of my readers won’t be pouncing on. Let me give you an example from USA and Europe. This might be a scenario where someone like myself has their investments in the US but is living in the EU and periodically sells off investments to use the money overseas.

In 2017 we’ve had a sexy run on the equities market with passive total market index funds being up by 11%.

 

At the same time we’ve had pretty significant change in the EUR to USD foreign exchange rate, nearly 8%.

 

That means that even though my investments profited 11% in the USA, by the time I converted the money into Euros, I would have locked in a profit of only 3% since I needed to account for the 8% foreign exchange rate.

 

Investing With Foreign Currency

Anytime you consider investing in another country it’s important to factor in the foreign exchange rate. And if you are considering retiring abroad, you can see how a small jump in foreign exchange rates can wipe out your profits.

From September 2016-September 2017 the euro went from €1.00 being $1.10 to $1.20. Only 10 cents – but in fact that’s an impressive jump in terms of percentages.

By the time you account for fees, taxes, and currency exchange rates, most of these sexy-appearing foreign investments will be nothing more than wasted time and lost resources.

The same goes for buying rental properties overseas which might have a CAP rate of 5% but end with a loss by the time you account for foreign exchange rates. Unless of course you can bet on the foreign exchange rates and have the luck, free time, and knowledge on how to do it successfully.

 

Betting On Currency Exchange

I can invest in another country and wait for the right time to convert the profits to the destination currency. Unfortunately, if not done right or if the markets don’t cooperate then you’ll cash out your investments and twiddle your thumbs waiting for a favorable exchange rate.

Using the example above, let’s assume I have 2 investments in both Spain and the USA. And both go up in similar amounts since the 2 economies are fairly similar. I can then use the currency exchange rate margin in my favor and cash out the investments in Spain and use them in the US due to the stronger euro.

On a recent trip to Canada I got to experience what a difference a stronger currency can make. I was buying Paloma cocktails at 5 CAD each but only paying 3.50 USD.

The final point I want to make is how much will you really invest in the foreign investment. For these currency hedged investments to be worthwhile you need more than $50k. And let’s be honest, we’re healthcare professionals, $50k isn’t all that much to us. You need about $250k to notice much of a difference in your lifestyle and to make it worth the headache and risk. Are you willing to park $250k of your money in another country?

 

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