Or, Why Your Canadian Friends Seem Happier
Being in the right investments but in the wrong currency is like swimming against a strong current. No matter how much you think you’re moving ahead, the current keeps pulling you back, impeding your progress or setting you back despite otherwise successful investment choices.
Conversely, being in both the right investments and currency is like swimming with the current, you progress much faster if you swim well, and even if you don’t, you can still move ahead. Even if your investments aren’t the best, if they’re linked to or denominated in the right currency, your net worth keeps moving in the right direction.
For anyone else hurt by the long term USD decline, the need to be aware of long term forex trends and diversify out of the USD is one of the most important and painful lessons of the past few years. Large forex-savvy multinational corporations have been aware of the trouble in recent years, but many smaller businesses and individual investors are only just beginning to awaken to the need for currency diversification. Even though the USD has been in overall decline vs. many major currencies (like the AUD, CAD and JPY) for a decade or more, or many decades (down 75% vs. the CHF since 1970) reputations die hard, and most US investors grew up believing the USD was the safest currency to own, backed by the best economy.Hey Canada, I Know What You Did Last Decade
Here’s a simple example of why awareness of forex trends is critical for every investor.
Imagine back at the beginning of 2000 an American investor #1 decided to seek currency diversification for his portfolio beyond the US, converted $100,000 USD to CAD, and invested the sum in a basket of Canadian stocks that comprise the S&P/TSX index, and index that tracks the Toronto Stock Exchange. His friend investor #2 took the same sum and invested it in the S&P 500 index.THE USD VS. THE CAD: CANADA’S BETTER AT MORE THAN JUST ICE HOCKEY
Here’s what happened to the USD vs. the CAD, as shown in the chart below of the USDCAD.
USDCAD JANUARY 2000 – AUGUST 18 2011 08AUG 18 1044
Obviously, we have a strong and overall very steady 10 year downtrend.
Here are the numbers.
USDCAD JANUARY 2000: 1.4478
USDCAD AUGUST 18 2011: 0.9839
% CHANGE: +32.04%
So, since January 2000, investor #1 gained 32.04% over investor #2 just on currency appreciation.EQUITIES: CANADA IS NOT JAPAN
Of course if you don’t have the right investments in a given currency, you still could lose. For example, if you sold US dollars and bought the Japanese Yen in 1990, you did even better than with the CAD in the above example.
Here’s the USDJPY chart from May 1990 – August 2011.
USDJPY MONTHLY CHART MAY 1990 – AUGUST 17 2011 03 aug 17 2046
Again, another obvious long term downtrend for the USD, this time vs. the JPY.
Here are the numbers.
USDJPY MAY 1990: 159.47
USDJPY AUGUST 2011: 76.45
NOMINAL CHANGE: 83.02
PERCENT CHANGE: 52%
However, if you invested your Yen in the Nikkei, look what happened:
NIKKEI 225 1990 –AUGUST 201110 chart courtesy of Yahoo.finance.com aug 181546
Your 52% gain in currency appreciation was more than counteracted by a nearly 75% drop in the Nikkei over the same period.
Meanwhile, look how your US dollars performed if invested in the S&P 500 over the same period.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?