I am pleased to say that I have readers from all around the world, which brings up some interesting problems and opportunities that purely US domestic investors may not need to think about too much.
For example, take Arkhom from Thailand who asks:
Just wondering, and this is a very simplistic view, that altho US stocks are definitely cheap in the long term, wouldn’t the value of US dollar also expected to decline sharply also in the long term? The USD view is conventional wisdom, with all that money being pumped/created for rescues and with current strength due to flight to safety in US treasuries. If that’s the case, it would most probably take the edge off the returns for US investment? Otherwise, in your case, wouldn’t it be more prudent to look for long term investments in, say, Australia?
I mentioned that I was having a little argument of sorts with my wife as to the best place to invest the little bit of cash that we received upon the sale of my Maserati in the US. Since we currently maintain two homes: one in the US and one in Australia, we have a unique opportunity to decide where to ‘park’ our money.
Firstly, let me explain why this is usually not a huge consideration for most small investors:
– If you are US-based, then exchange rate movements only matter indirectly.
By that I mean that the value of US businesses – hence stock prices – don’t necessarily jump directly with exchange rate movements (unless the company is primarily invested overseas, or derives the bulk of its revenues from import/export). But, logic tells me that all businesses are eventually affected … they all buy goods, equipment, and/or components, inevitably some of which comes from overseas.
A strong US dollar makes these cheaper and a weak dollar, more expensive … but, the effects on that company’s stock price are generally slower as they must first flow via the company’s profit and loss statement.
– If you are an overseas-based long-term investor then exchange rate movements may have less effect than you at first intuitively expect.
The reason is that your money may flow into the US (if you are in, say, Thailand), but must must eventually flow back out again so that you can spend the money! So, it is really the long-term CHANGE in the exchange rate that affects you.
– For an investor who lives in two economies (like us), then we can earn and spend money wherever we like and move funds as necessary between the two economies … so, we can make earning and spending decisions independently of each other.
For example, to buy the Maserati we moved funds from Australia to the US at roughly 80 cents in the dollar; and now that the vehicle is sold we can move it back at approx. 66% cents to the dollar, or a ‘net gain’ of 15% or so.
The two questions then become:
1. Can we gain more than 15% over the next 12 months by investing in the US instead of moving the funds to Aus and investing there, and
2. Does it really matter? Where do we intend to SPEND the money?
The answers to these questions usually lead me to: it doesn’t much matter!
In theory, yes, but in practice, no …
You see, if you move the money to invest and move it back to spend, then you are not only gambling on the current currency exchange conditions being favorable, but also the future ones being equally favorable. It’s hard enough to make such predictions today, let alone tomorrow!
Now, exchange rate fluctuations ARE very important for a special class of investor … but, not for the average investor unless the exchange rates are totally out of whack … but, who’s to say where the Aus v US dollar really is set to lie over the next 20 years?
Can you tell me with any degree of certainty?
I can’t tell you … so, all I need to really think about right now is where do I really want to spend my money today, tomorrow, and in 20 years time 🙂
I completely agree.
Another point on how hard it is to predict currency movements: I spent some time last week comparing forecasts from major financial institutions for some currency pairs that I am interested in. There was nothing even close to a consensus for the currencies I looked at. If the experts produce such diverse opinions, I take that as a reasonable indication of just how hard and how hard it is to make either short or long term predictions (although if an economy is looking in bad shape, that is usually a good indicator that the currency is going to suffer).
This doesn’t mean that speculating on currencies is pointless – the Yen/NZD carry trade was good while it lasted – but it is risky.
This Adrian, is a really really great Post. I never had considered exchange rates in the past, however, since we have businesses,in the Phils(and Plan others in the future) I think we need to be aware of exchange rates. 🙂
If we are earning money in The Phils, and plan to spend it in the U S< with our (American)Money being worth about 3 to 4 times the Philippine Peso, will that negatively affect us? or will it positively affect us?
I know I like to Shop The Phils for cloths (as they are about 60 to 75% ) cheaper there than here.And I get some very nice cloths there. 😉
@ Steve – You’re looking for CHANGES in relative currency rates; so the question is: which way do they have to move to help/hinder you, and THAT depends on whether you are a net buyer or seller in each country …
Well, I am thinking net buyer right(as we would be earning the money in pesos and then need to buy American dollars to be able to spend it here).
But then again, some of that will have to remain in pesos and in the Phils, as reinvested into the business,for expansion purposes.