Canadian investors are often more inclined to invest overly in their local market than in currency investing. This propensity is referred to as “local bias.” It entails that rather than expanding with an internationally exposed portfolio, many Canadians would rather opt for a more “close-to-home” strategy. The trouble with this local bias, however, is poor diversification.
The Canadian stock market is condensed to a few industries, namely, energy and finance. Moreover, these sectors are a small portion of the international market. So Canadians should consider foreign currency investing to get a bigger piece of the global-investment pie.
Forex investments can open new markets and wealth-building opportunities for Canadians. But of course, education is key to success. So keep reading to learn what you need to know about foreign currency investments.
Foreign Currency Risk
You want to build an internationally diverse portfolio. However, as a Canadian, this will require you to look outside our borders. We use each country’s individual currency when investing in Asian, American, or European enterprises on the foreign stock market. As a result, this method allows Canadian portfolios to gain exposure to other currencies, and the exchange rate shifts of those foreign currencies in addition to the Canadian dollar.
How to Manage Currency Risk
As a Canadian investor, if you make investment purchases designated in a different currency (e.g., USD, Euro, Japanese Yen, etc.), two variables will determine your overall return – investment performance and currency exchange rate fluctuations. Unfortunately, no one-size-fits-all solution exists for currency risk management. However, one of the best lines of defence is simply being aware.
Investors unaware of the impact of investment return exchange rates may overlook currency risk altogether. But those familiar with such dynamics can make deliberate decisions to manage their portfolio’s currency risk properly.
You can protect your portfolio from currency risk using a method known as hedging. Hedging techniques can be complicated and demand a particular skill set separate from conventional portfolio management. Furthermore, hedging can be likened to an insurance policy. By purchasing other marketplace investments, you can protect your portfolio from unfavourable foreign currency shifts.
Currency Risk and Fixed-Income Portfolios
Hedging techniques are more common in foreign fixed-income portfolios. The reason is due to how fixed income investments work within portfolios. Generally, a bond will reimburse biyearly interest payments to the shareholder. The short-term currency oscillations can significantly impact those remissions when translated to the domestic currency of the investor.
Moreover, since bond returns are typically less when compared to equity returns, currency oscillations can have a far greater impact on overall returns than with equity investments.
Expanding Your Investment Opportunities
As a Canadian investor, you want a well-diversified and protected portfolio. Ensuring this outcome is simply a matter of looking beyond the Canadian market, and that’s what forex investing can help you achieve. At CWS Capital, we have been helping Canadian investors do more with their portfolios since 2013.