- December 15, 2018
- Bob Quinn
- Financial Planning
Alongside the engrossing political story that continues to unfold across the water, there is an equally gripping one; the fate of the British pound.
The pound falls; the pound recovers; the pound is at a two-year low against the euro.
If you have a sterling-denominated investment with a fixed end date falling in the near future, you’re either glued to the financial news or you’ve stopped listening. Either way, there’s a good chance you are going through hell right now.
Let’s say you are in the nightmare scenario of your investment term ending in the next four months or so. Let’s assume you need that money immediately to pay for something in euros – you have no option to wait until the pound recovers.
You are at the mercy of the currency markets on the day you do the foreign exchange. If the pound is weaker than when you invested the money, and there’s a very strong chance it will be, that drop in value could wipe out any interest the investment earned. If the investment lost money, your loss is exaggerated by the currency swing.
By way of example, on 29th August, 1 euro was worth 91p; on 13th November, 1 euro was worth 86p. That’s a 7% difference.
Of course, the 7% could be in your favour, but there’s no way of knowing, and that’s why it’s stressful. It’s pot luck.
Playing mind games with the markets
If you don’t need the money right away, you have the option to re-invest it in a sterling-denominated fund or project to avoid the currency loss, but what happens when that term comes to an end, or you need the money in a hurry? You are potentially entering into a never-ending struggle to out-wit the currency markets. Plus, there is the hassle of trying to find something to invest in that matches your risk profile and financial objectives.
Brexit and trade wars have the world’s attention right now, but they will pass. Many of my clients are long-term investors and I encourage them to turn a blind eye to short-term volatility such as what we’re experiencing right now. Why? Because it won’t have a meaningful impact on the long-term performance of their portfolios.
Specifically, on currency, my advice has always been to invest in euro-denominated investments, or in non-euro vehicles where there is hedging to protect against currency risk.
I touched on this in last week’s blog. Diversification is the only antidote to uncertainty. I advise my clients not to put all their money in one basket, and that means not putting all their money in one currency, one index, one industry, and, least of all, one asset class.
It’s like Dulux Weathershield for your wealth – all-weather protection.
Take a listen to my contribution to Ivan Yates’s show, The Hard Shoulder earlier this week.