Diversify assets in currencies, or not?

[wolf]

I read the following article on portfoliocharts (@Tyler9000: Many Thanks to you for your website!)

https://portfoliocharts.com/2017/06/09/ ... awal-rate/

Beside the great information about the variations of the SWR in the home country it has a chart about currency fluctuations.
https://portfoliocharts.files.wordpress ... untry1.jpg

I have reviewed my investment and net worth asset allocation regarding underlying currencies, e.g. my real estate and my retirement account is hold in €, but I can manage to diversify my investment portfolio in USD and EURO.

Currently I aim for an overall currency diversification of about 75% EURO and 25% USD. Well, I mean, that I hold the assets in those currencies. But I ignored the regional asset allocation of the equities, because it would have made it too difficult to analyze, e.g. a MSCI WORLD ETF in USD is counted as an 100% USD asset position.

I am interested if you too hold assets in difference currencies?
Do you diversify on purpose or is it randomly?
Is it better to have all assets in your home country currency? Or ist diversification better?
Well, I guess it depends..., but I am interested on what maybe? And how you manage it.

[ThisDinosaur]

I am very internationally diversified. And I am unhedged for currencies.

All things being equal (and the never are) countries and their currencies tend to move in the same direction most of the time. If the country in question is being very productive, they will export more than they import. Exporting goods in exchange for currency takes some of their currency off the international market, which results in that currency becoming rarer/more-valuable/stronger. This has a tendency to correct itself because, as i.e. the dollar gets stronger, foreign goods become relatively cheaper, which results in people buying more internationally / more imports. So exchange rates are largely stable over longer time periods.

The exception to this is when tariffs, trade barriers, and currency wars interfere with the free market of goods and currencies. When that happens, all markets involved tend to do less well.

TL;DR
No. I don't hedge. I think it would rarely benefit me and mute returns.

[wolf]

I am very internationally diversified. And I am unhedged for currencies.

With this, do you mean that your portfolio is diversified?

I am refering to all of your assets, e.g. real estate, retirement account, IRA, cash, real assets, equity ETFs, etc.

What would happen if almost all of your assets are hold in USD and the USD crashes and devaluate?

With diversifing currencies I mean to review and manage the currencies you hold. But I can only manage my portfolio assets actively. I cannot manage my real estate nor my retirement account, because both are EURO and I can't change that.

[BlueNote]

Are you talking about holding hard currencies from different countries? I don't see currencies as an investment because they don't produce 'enrichments' (dividends, interest, rents or retained earnings) for the owners. However if I were planning on travelling the world long term (for years) and had a large lump sum of cash to finance that trip I would consider diversifying currencies in that type of situation as a hedge.

Most of my investments are in stocks which are heavily diversified geographically ~3/4 foreign and 1/4 local. My fixed income investments are are all local currency. The currency volatility of a large foreign fixed income portfolio would befoul any fixed income diversification for me. Note: I am living in a very economically stable country, my strategy would be contingent on my economic environment.

[wolf]

Are you talking about holding hard currencies from different countries?

No, I don't mean holding hard currencies. Maybe I gotta explain it better. I live in Germany. You could buy ETFs with different underlying currencies, but of course you always pay in EURO.
For example you could choose between two ETFs which mirrow the same index
ETF1 MSCI WORLD hold in USD
ETF2 MSCI WORLD hold in EURO

Therefore I have the possibility to choose and therefore to manage currency diversification a little bit.
If the EURO sinks, the ETF1 rises due to currency fluctuations.

So...does it make sense to hold all net assets in EURO, if I live in the EU?
Or does it make sense to hold a part of my net assets in USD?

Well, I have already decided that I want to aim for a 75%EURO and 25%USD share, but I am interested if and how you also consider such a thing?

I hope that I explained it better than in the first post. Maybe it is also irrelevant in the long run (10-30 years).

[BlueNote]

ok I understand a bit more now.

In your example does ETF1 and ETF2 track the same index? If that's the case there's no currency diversification between the two because the prices of the ETF(in the currency it trades in) will adjust based on the underlying securities. All my foreign stock ETF's are denominated in CAD because that's just easiest for my broker and me to deal with. It wouldn't make a material difference to my net worth if I held an ETF tracking the same index with the same MER that was bought and sold in USD, Euro, JPY etc.

[wolf]

In your example does ETF1 and ETF2 track the same index?

Yes, ETF1(USD) and ETF2(EURO) track both the same index. Think about the following scenario:
1. currency value EURO:USD = 1:1
2. Buy ETF1(underlying currency USD) 1 piece costs 1 USD, so you pay 1 EURO, due to currency value (see above point 1.)
3. Buy ETF2(underlying currency EURO) 1 piece costs 1 EURO, so you pay 1 EURO
4. the Index doesn't change, but the EURO:USD currency value fluctuates to 1.3:1
5. ETF1 with 1 piece USD is worth 1.3 EURO, due to currency value (see above point 4.)
6. ETF2 with 1 piece EURO is worth 1.0 EURO
--> ETF1 is worth 30% more than ETF2

I don't know if that is uncommon in USA/Canada, but in Germany it is possible to buy ETFs with different underlying currencies of the same index.

Physical Gold is maybe a good example. Gold is traded in USD, but you always buy it with your home currency, e.g. EURO or CAD. I think there are ETFs that are daily hedged, but if you buy it physically you have to accept currency fluctuations, don't you?

[BlueNote]

@MDFIRE2024

This article explains why it doesn't matter what currency your ETF is listed in better than I can.

No you don't have currency risk by holding a commodity type asset like gold. What you do end up with is pricing risk in that you have to accept the value set purely by supply and demand for that commodity which isn't tied to a valuation of future cash flows. Assets that throw off cash flows like stocks, rental properties and bonds also have prices set by supply and demand but these asset prices are influenced by their cash flows and you get to keep the disbursals in the form of dividends, interest and rents.

[Dunkelheit]

@MDFIRE2024

This article explains why it doesn't matter what currency your ETF is listed in better than I can.

No you don't have currency risk by holding a commodity type asset like gold. What you do end up with is pricing risk in that you have to accept the price set by supply and demand for that commodity which isn't tied to a valuation of future cash flows.

Exactly. Well, the currency matters just in the moment you buy or sell it. You can buy an ETF based in euros and you wouldn't need to exchange them beforehand to dollars. But both ETFs track the same index, which can be denominated in dollars, euros or whatever currency.

A different case would be a hedged ETF, where the currency-based would be hedged against the rests of currencies (or most of them). In the case of a MSCI WORLD euro hedged ETF, the euro would be hedged against dollars, pounds, yens... When you hedge you're betting that the hedged currency will perform better than the rest. Hedging has also a cost that would be deducted from the index yield.

[ThisDinosaur]

I am very internationally diversified. And I am unhedged for currencies.

With this, do you mean that your portfolio is diversified?

I am refering to all of your assets, e.g. real estate, retirement account, IRA, cash, real assets, equity ETFs, etc.

What would happen if almost all of your assets are hold in USD and the USD crashes and devaluate?

I mean that I'm a US investor and most of my assets are in non-US equity index funds and ETFs.

As others have already said, if the US dollar suddenly experiences hyperinflation/devaluation, I expect the underlying assets in my non-US funds will maintain purchasing power.

Of course, since the USD is a world reserve currency, and world markets are intricately linked, I also hold gold ETFs.

[wolf]

Thank you all for your explanations and examples. I do understand it better now and got more perspectives. I do value diversification a lot and therefore I think also about currency fluctuations. Somehow I want to be prepared, if the EURO devaluates. Well, I see the risk that the currencies fluctuate +/-30% within a 5 year timeframe, as the chart shows https://portfoliocharts.files.wordpress ... untry1.jpg.

[Seppia]

In my opinion it's good to have a bit of home bias if you're european.
You pay your bread groceries rent etc in euros, so they matter more to you.
If you hold investments for a long time, mathematically it's better not to hedge (hedging has a cost).
My two cents is that as with everything in investing, there isn't a "correct" answer.
The only incorrect one in your case would be (again my two cents) holding mostly non-euro currencies.

[wolf]

@Seppia
I hold and will hold mostly of it in EURO (as long as the circumstances stay the same, e.g. living in Europe)
But I am wondering, how is the home bias just a good thing to Europeans regarding paying everyday stuff? Isn't it valid for every other currency and country/region then as well?

Hedging, I don't do. I have already figured out the difference in TER between a ETF with its hedged ETF counterpart.
Because of this discussion I understand the principles behind the Permanent Portfolio. I think, that the original Permanent Portfolio had focused and still does on the home country. So, that the Permanent Portfolio Value is best as possible linked to the local purchasing power (currency "value"). I think that is my personal reason, why I am satisfied with the EURO dominance of my assets (...as long as the circumstances stay the same, e.g. living in Europe)

[Seppia]

If we assume that: no home bias = having an asset allocation that matches a cap weighed globally diversified portfolio, the reason why I think home bias is particularly important for people living in euro area can be found by looking at the composition of a world index etf
https://global.vanguard.com/portal/site ... docId=1011

An American investor will naturally have 50% in usd
An euro-area investor will have much less assets in euro if he/she follows the same country allocation.

[finity]

I do value diversification a lot and therefore I think also about currency fluctuations. Somehow I want to be prepared, if the EURO devaluates. Well, I see the risk that the currencies fluctuate +/-30% within a 5 year timeframe, as the chart shows https://portfoliocharts.files.wordpress ... untry1.jpg.

There are a few things to think about:

1) As long as you are in Europe, a devaluation will not hit you hard, especially if you are living a low-key lifestyle not buying foreign products. I can't really think of many products that are not produced in Europe or can't be bought used (think computers).
2) There is a good chance that internationally selling European stocks will actually rise, because they can produce cheaper (labor is payed with a weaker currency, income in part in stronger foreign currencies => higher euro-denominated profit).
3) You can always DCA into MSCI World if you want to diversify out of the euro-zone (personally, I like Euro-stocks because I'm much less affected by currency fluctuations and point 1) and 2))
4) If shit really hits the fan (i.e. end of Euro-zone / financial system melting down), government will find a way to make you pay either way.