02/10/2014 – Probably the most commonly asked question that we get from Aussie expats is where they should hold their investments and in what currency. This may seem like one of those “how long is a piece of string” questions however it is relatively easy to work out. The rule of thumb that I use is your money should be held in the currency of the country that you intend to retire to. If you intend to retire to Australia then the bulk of your assets should be held in Australian dollars, if you intend to retire to Europe then you should start building your assets in Euro’s.
The premise behind this is that you want to try and avoid currency risk. Investment banks and multi national corporations spend tens of millions of dollars a year trying to determine which way the currency is going to go and still get it wrong so what chance does a individual have? By accruing assets in the currency that you intend to use in retirement sure you may lose a bit if the currency moves against you whilst you are an expat however the same could be said for the alternative.
You may also introduce a investment technique that has been used for years called dollar cost averaging. Lets say for example you are moving money from US Dollars to Australian Dollars. If you transferred US$50,000 every year for the last 5 years on the 30th of June then you would have achieved a average price of USD$0.96. Now that doesn’t sound too good given the current exchange rate is $0.87965 however that is only a 8.37% difference over 5 years which translates to 1.67% per annum. Given the volatility of the currency markets this is actually a very good result especially when you consider that the currency was well about parity in 2011, 2012 and 2013. If we go out to 10 years then you would have achieved an average price of $0.8912 which is only 1.29% away from the current price.
Now I could have used a different date through the year when the currency was more favourable for my argument however I wanted to show the net affect when the currency was at its highest to prove that even when the dollar was at $1.09 to the US Dollar in 2011, $1.07 in 2012 and $1.05 in 2013 you can still achieve a good price in the long run.
Time and time again I have seen clients try and time the market however when they elect to make the move back to Australia or whatever country they intend to retire to there is no guarantee that the currency will be in your favour. The markets can’t work out what the currency will be in 6 months time let alone in 5 years time when you intend to repatriate and move your assets so why gamble with your retirement.