The impact of foreign currency on investing returns

Wednesday 16 June 2004

Investing internationally is important because it diversifies your portfolio. With much of your livelihood (like your job and the value of your home) dependent on the domestic environment it is a good idea to reduce risk by having some investments overseas.

By The Landlord

At any given time the market in different countries can behave quite differently. For example, while US and European sharemarkets have recently been adversely affected by increased threats of terrorism, in New Zealand we have remained relatively immune to these geopolitical risks.

The downside of investing in international market is that it means exposing your investments to foreign currencies, and while this is also offers diversification, it also means a whole new set of risks that can introduce volatility to your portfolio. However, there are tools to manage this risk and access to these tools is a major advantage of using professional investment managers. In fact, they may be able to use the changes in exchange rates to your advantage. In this article we will look at how exchange rates affect your overseas investments, how managers can reduce the impact of currency on your portfolio, and what hedging is and how it works.

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