We asked David Kuenzi to advise expats grappling with investing and foreign currency issues.
For globetrotting expats, matching the currency denomination of assets and liabilities requires conscious planning. For example, an American expat in Munich who intends to remain permanently in Germany will want to allocate a significant part of her portfolio to euro-denominated stocks and bonds. Such investments will have much stronger long-term correlation with the underlying cost of living in Munich than would a similar portfolio dominated by U.S. dollar stocks and bonds. Similarly, an American executive living for several years in London, but fully intending to return to the U.S., should build a portfolio of investments more heavily weighted in U.S. dollar investments.
Many expats have no idea where they will retire. In this case, the investor should focus on diversifying widely across many different underlying currency exposures with the goal of not linking a portfolio’s long-term performance with the fate of any particular currency.
Here are four tips expats might find useful as they ponder the forex implications of savings and investing strategies:
Tip #1 – Currencies are not an “asset class” and are not themselves good investments.
All currencies will lose value (purchasing power) over time due to inflation (even historically strong currencies such as the Swiss Franc).
Tip #2 – Don’t bother trying to manage currency risk by shifting savings back and forth between different currencies.
This approach merely replaces long-term investing and currency planning with short-term speculation. Currency trading transaction costs are high and the likelihood of correctly anticipating foreign exchange moves is low. Furthermore, when investors focus on moving between currencies they forgo the real long-term investment gains that accrue from a portfolio of long-term financial assets (stocks and bonds).
Tip #3 – Understand your investment portfolio’s FX exposure.
Many expats lack a fundamental understanding of the real currency exposures inherent in their investments. Most large-company shares trade on many different national exchanges and are paid for in the local currency. For example, millions of shares of HSBC trade daily on both the New York Stock Exchange and the Hong Kong Stock Exchange. The shares are identical and the value of the investment will be exactly the same whether calculated and paid for in U.S. dollars or Hong Kong dollars. The same holds true for mutual funds and ETFs. A U.S.-traded ETF that invests only in European shares holds all the same shares as a European-stock ETF trading in Frankfurt. The fact that the U.S. ETF trades in dollars and the European ETF trades in euros does not change the fact the underlying investments in both funds are the same as is the currency exposure.
Tip #4 – Consider a multi-currency U.S. brokerage account.
A corollary conclusion is that a true multi-currency portfolio can be built anywhere that broad access to global funds and investments are available through standard brokerage accounts. In this respect, U.S. brokerages typically offer superior access to global investments. For American expats in particular, compliance and tax issues further increase incentives for building multi-currency portfolios through U.S. accounts. Hence, Americans abroad have strong reason to hold investments through U.S. accounts even if they are living permanently abroad. That said, U.S. expats are increasingly finding it difficult to maintain U.S. brokerage accounts abroad. Here’s a piece that Creative Planning International wrote on the subject.
Mr. Kuenzi is the Director of International Wealth Management. Prior to joining Creative Planning, he founded Thun Financial Advisors, a leading independent advisory firm serving Americans abroad and investors across the globe.