19/01/2015 – Towards the end of last year I wrote a post about what currency an Aussie expat should hold and in the post I explained that the general rule of thumb that I use is to accumulate assets in the currency that you plan to retire in. The reason for this is that the one of the biggest risks that a expat faces is currency risk. Financial markets cannot determine what the currency will do in the short, medium or long term so why jeopardise your retirement with an educated guess.
The recent decision by the Swiss National Bank to end its three year policy of capping the Swiss Franc at 1.20 to the Euro has triggered volatility in the currency market that hasn’t been seen for many years. At one point the Franc had surged by as much as 41% and climbed more than 15% against all of the major currencies. With this volatility we have seen a number of Foreign Exchange brokers experience massive losses and some have even gone broke.
Now imagine you are about to retire or repatriate back to Australia and the currency that you are holding your assets in depreciates by 41% instead of appreciating.That would certainly leave a dent in your bank account. What we have seen over the past week is an event that could not have been foreseen and unfortunately there will be other events over the course of your time away that will move your currency both for and against you. By utilising the dollar cost averaging approach what you ensure is that over the course of time you are transferring your assets at an exchange rate that you are relatively comfortable with. Lets say for example that you make 1 transfer a year over a 10 year period. For 9 of the 10 years the currency moved around but not extremely and then in the last year it dropped 40% the month before you left for home. Due to the fact that this last transfer only comprises of 10% of all of your transfers then the 40% drop only equates to a total fall of 4% across all of your transfers. Now this example doesn’t take into account the prices that you achieved for 9 of the 10 years but you get the idea of not putting all of your eggs in one basket.
The foreign exchange market is littered with stories of those who have luckily been on the right side of a currency move but there are also a lot of stories of those who haven’t been so lucky. One of the victims in the latest Swiss Franc event was a hedge fund called Everest Capital who had USD$830 million invested in a fund as at the end of December. They have yesterday announced that they are closing the fund after losing virtually all of its money.