Travelling overseas is a great enjoyment to many people – the prospect of new experiences, new cultures and for some, new avenues to shop!
It also provides perspective on Australia’s size relative to the rest of the world, with booming populations, rapid growth and industrialisation in formerly third world countries.
Just as people continue to travel; looking for new experiences, capital continues to flow around the world, looking to invest in markets.
And if we’re talking capital markets, take Australia versus the rest of the world; we are a tiny slice of global share markets – less than 3%. So only focussing on Australia means an investor is less diversified and may miss growth opportunities.
Yes there is a hitch, currencies tend to fluctuate. While you may make 8% with an overseas investment, if the Australian dollar moves up 10%, you’ve lost money!
This is why currency hedging is a valuable tool in countering this scenario.
Currency hedging is essentially an insurance policy used to protect your investments against losses due to currency fluctuations when investing overseas.
A strategy could be hedging 50% of the overseas investment while leaving the other 50% unhedged. That way you’re protected against any currency fluctuation – one directional movement offsets the other.
An analogy is taking a US trip – the Australian dollar is currently high, giving you greater spending power, but if your holiday isn’t for six months the dollar could fall.
If you were to swap 50% of your spending money into US dollars now and in six months time the Australian dollar falls, you’ve partially protected your savings and have more spending money than you otherwise would have.
Remember, that extra money will make a big difference – you don’t want to decide on which child to leave in the hotel room while you go and have fun at Disneyland!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we ‘re one of only six certified fiduciaries in Australia.
