Hi RIP readers,
Last months my finances have been dominated by currencies fluctuations more than savings and/or investments earnings (and/or weddings!). I’ve always considered currencies fluctuations a minor factor (and I still do) in wealth management. A factor not worth taking into account, especially when talking about three of the most stable currencies around: the Euro, the U.S. Dollar and the Swiss Franc. They’re pretty solid, aren’t they? None of these will swing by more than 5% in a year compared to any other of them, am I right? We’re not in Zimbabwe!
Well, no. Currencies, even the most stable, have trends and drifts. They’re like giant turtles: they have smaller short term volatility compared to stocks and bonds, but they may go on a straight line for months and accumulate a substantial gap over years.
Before you start screaming: no, I’m not going to invest in Forex or other pure speculative assets anytime soon. Speculating over currencies is a pure bet and you shouldn’t do it for the following reason: while stocks and bonds are expected to grow in the long run, currency pairs are expected to stay neutral. Why? Well, you tell my why not! So you’re facing trade fees for a zero expected return. Even worse: professionals and more informed traders are playing with Forex trading better than you do. Guess who’s going to get the pluses in this zero (almost, due to trade fees) sum game?
So why do I care about currencies?
Yes, the wise investor mantra! Diversifying by currency is another way to avoid betting on a single horse, a way to edge yourself against high inflation in your main currency.
“But RIP, being exposed to a single currency is how almost anyone live… Are we all crazy??”
No, they are not. But it’s important to know that even though my grandpa is not investing, he actually is. He’s investing all in Euro currency: his pension, his flat and his savings. It’s an accepted risk, maybe. But it’s important to be aware and recognize you’re at risk. A small risk, if your main currency is the one used in the country where you live and where you plan to live for the rest of your life.
Anyway my situation is different – and I assume I’m not alone in this, given the high mobility of my generation: I was born in Italy, I’m living in Switzerland and I’m working for an American company (and planning to comeback to Italy). I need to play with three currencies!
Note: when I say “diversify by currency” I don’t mean the trading currency. I mean the currency of the underlying assets. For example, if you own a S&P 500 ETF traded in CHF it doesn’t mean you are exposed to CHF, you’re still exposed to USD which is the currency of the underlying assets. In case CHF halved compared to USD, you’r fund is going to instantly double its face value in CHF.
“Ok, RIP, what are you going to do to edge yourself against currency fluctuations?”
Well, I don’t know yet. First step is always awareness: I’ve added a new sheet to my NW spreadsheet to monitor my currency exposure across EUR, CHF and USD.
Second, I’m probably going to try to keep my exposure almost always balanced, eventually slight unbalanced in favor of EUR first, CHF second and USD third – that’s because I plan to retire in Italy. If plans will change, balance changes too. I’m not going to formalize this by adding some rules to my IPS, I’ll just drop an eye on it every once in a while.
Let’s take a look at our currency split over the last 5 years 🙂
Here are absolute values of assets in each currency.
To compare apples with apples everything is converted to EUR. It means the ~290k peak in the green CHF line in January 2016 is actually ~320k CHF (1 CHF = 0.903 EUR in January 2016).
What we can see is that last 5 years can be divided in 3 phases:
First, the “What are other currencies?” phase. From minus infinity to November 2012. Before moving out of Italy I only owned assets in Euro and everything was easy.
Second, the “Holy sheet let’s pile a huge amount of cash in this fancy currency!” phase. From November 2012 to January 2016. I’m so dumb. I’m sooooo dumb. I’ve been saving ~70% of my salary and watching the pile grow in my 0.1% saving account. So ridiculously dumb. Btw, the jump in January 2015 is due to unpegging CHF to EUR. I’m so dumb.
Let’s take a look at S&P500 between November 2012 and January 2016
Out of those 320k CHF, 200k were investable cash (the rest being Pension Pillars 2&3). I just ran the math to quantify my dumbness, i.e. how much it would have become if I had invested month by month during those 3 years. Drums roll… 242k tadaaaa. I left 42k CHF on the table by not investing for those 3 years. Second biggest financial mistake of my life!
Takeaway for you readers: invest as soon as possible.
I’ve always been financially illiterate and scared of market crashes. I just stashed cash, but to reach FI you have to invest your stash. You need your green army to go to work for you!
Third, the “Wait, let’s try to be smart” phase. From February 2016 on. Started investing, differentiated by asset class, markets, currencies… Did a huge rebalance in November 2016 to expose myself more to EUR than CHF and USD. EUR is so predominant today due to currency fluctuations, maybe I’ll rebalance again in January 2018.
Here’s percent split of our NW:
and here an area chart because… why not?
Final thoughts: even if you’re living your single currency life, please take few minutes to consider whether it’s worth diversifying your assets by currency. This is not a game where passive play is safer than active. You’re always in the game, even if you’re not aware of it.