How to make Exchange Rates work for you.

How to make exchange rates work for you rather than against you?

This is particularly important for expatriates. If you are working abroad, a good strategy for dealing with exchange rates can make or break your retirement. This article covers only a few basic strategies and does not aim to be comprehensive. However, we certainly hope to encourage you to start thinking about the impact of exchange rates on your portfolio.
We know that the right asset allocation for you depends on specific circumstances, but expatriates generally:

  • must deal with expenses in multiple currencies
  • have higher risks than others for “low risk” assets like cash and bonds
  • are more open to retiring in a foreign country
  • can easily return home if circumstances change

The ability to return home is a frequently overlooked advantage for expatriates. While exchange rates can move for or against you, expatriates can usually avoid the worst outcomes by simply going home. For example, a Brazilian expatriate who landed a US job that pays in dollars a few years ago would have seen their salary go up substantially in terms of the Brazilian real while Brazilians at home endured a painful recession. A German expatriate who got a job in Russia ten years ago when the oil prices were surging could have returned to a more stable currency and a more prosperous economy in Germany whilst Russians at home had no such option. Heads you win, tails they lose.
Now with that said, it is actually the currency rather than the country that determines many of your exchange rate risks and rewards. If you are paid in your home currency and work in a foreign country, then your pay might not keep up with your expenses. On the plus side, you’ll find yourself with extra cash if your home currency goes up. The dangers and opportunities are simply reversed when expatriates are paid in home currency. There really is no risk-free option when pay and expenses are in different currencies.
However, we know intelligent ways to hedge. Naturally, a mix of home country and residential country investments reduces your risk. There are also ways to use options and futures contracts to reduce your risks and maximise profit. Options generally allow you to limit your losses while retaining unlimited opportunities for gain.
Most individual investors do not have very much experience with options, so an example should prove helpful. Let’s take an expatriate from the US who lives in the UK, and has all of his assets in a checking account in the UK. He would have lost something like 16% in US dollar terms because of Brexit in 2016, but he would have made over 7% in the first 10 months of 2017 as the pound rebounded. Now suppose that he had been able to buy an option to protect himself from declines in the pound for 4% a year. In that case, he would have lost only 4% (the cost of the option) in 2016 and gained 3% in the first 10 months of 2017. This is only a simplified hypothetical example, and we generally do not recommend keeping all of your assets in cash.
Cash and bonds are typically considered safe assets, but they also give you lower returns. As we have seen, most of the risks for cash come from betting on the directions of currencies. There is usually no reason for you to expect that one currency will rise relative to another. However, stocks compensate you for short-term volatility with greater returns in the long-run. Because of higher returns, we find that it is often a good strategy to substitute market risk for exchange rate risk.
If we return to the example of a US expatriate living in the UK, we can see how stock markets interact with exchange rates. The UK’s FTSE 100 index rose over 14% in 2016, mostly offsetting the decline in the British pound. The relationship is rarely that direct, but a declining currency frequently boosts the local stock market.
Another approach for you to consider is simply accepting some exchange rate risk and investing in the most competitive companies regardless of location. Many expatriates work for multinational companies and know that they are often the best companies in any country. For example, the key to success in the bearish Japanese stock market of the 1990s was investing in internationally competitive companies like Sony and Honda. Multinational companies are lower risk investments for expatriates because they are not dependent on any single stock market or currency. A multinational approach works particularly well when you plan to travel extensively after you retire.
On the other hand, investing in real estate is a good way to reduce exchange rate risks when you know where you want to retire. You can lock in today’s rates and prices on a very large asset by getting a mortgage on a house in your target retirement country. If you don’t live in the house yet, you’ll be able to rent it. The rent that you collect is in that country’s currency and can be used to pay the mortgage in that currency. Your exchange rate risk is reduced, but a house is only one part of your retirement expenses.
The currency of your preferred retirement location can rise so dramatically that you can no longer afford to retire there. A natural way to hedge against this risk is to make investments in the retirement country. If you know where you want to retire, it also makes sense to buy more bonds in the retirement country’s currency as you approach retirement.
Although retiring to another country can be a good strategy for anyone, it is particularly attractive if you have worked overseas. Sometimes, people will live and work in a country and then decide that they want to retire there.
The best advice for an ever-changing world is to respond intelligently to changes in your life and changes in the markets. The exchange rate strategies that we presented here are just a preview. We certainly hope to encourage you to start thinking about the impact of exchange rates on your portfolio.
For a more comprehensive overview or to look at the opportunities already available to you, please do contact us at


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