[p0pularopinion]

I find the S&P500 to be interesting as a demonstration for currency risk. Denoted in US, it went up ~18% or so. For me as an EUR investor, it went up just 4.6% when accounting for the loss of the USD. Comparing that to indicies that usually do not perform that well, Euro Stoxx 50 is up ~22% and MSCI Emerging Markets ~21%.

[baxtr]

I noticed this as well. I haven’t found a good cure for this other than diversifying globally.

[dottjt]

I could be misunderstanding this, but you know that you can buy ETFs that are currency hedged?

Taking Vanguard for example, VGS is global equities, but VGAD is global equities that are AUD-hedged (my home country).

The only downside is that you pay more in fees (and they're less tax efficient). People generally don't bother with it though, because on a long enough time-line currencies usually revert to their long-term average, so if you're holding for retirement there's generally little point.

[rsynnott]

> The only downside is that you pay more in fees

This is a _huge_ downside for index funds, though. Even quite a small fee difference has a huge compounding impact over time; people often miss just how much.

AIUI, assuming you're investing in a global equity fund, currency hedging is almost never worth it. It _may_ be worth it in some cases if you're investing in a foreign index (eg S&P for Europeans), but even then not usually.

[dottjt]

It depends if you forsee potentially having to sell before retirement. Or if it may just happen out of your own circumstances.

Hedging is all about diversification at the end of the day. So it makes sense to hedge if you're coming close to retirement age.

[AnimalMuppet]

Let's say I'm close to retirement. And let's say I'm in US dollars, and the dollar isn't doing well right now, and might continue to not do well for a long enough time frame to matter to me.

On the other hand, my expenses will also be in US dollars. To what degree should I hedge against the dollar?

[dottjt]

Hard question to answer without understanding your circumstances.

Ultimately the point of hedging is to diversify. So the degree you should hedge is relative to the degree with which you have exposure to your home currency. So for example, if you already own a home in that country + you already own lots of shares in that home currency, then hedging might be less important.

The recommendation I've seen is around 25% of your portfolio in hedged global equities, assuming you have another 25-30% in non-hedged global equities.

[dottjt]

Oh right, sorry I completely misread this.

I'm actually not sure in your case. My guess is that it's something you wouldn't need to worry about, but I don't know.

[aswegs8]

TIL: currency moves have zero expected return

[dottjt]

You also can't predict when you might need to sell you stake, so that's ultimately the value of hedging. If you're forced to sell in 5-10 years, then hedging would be valuable.

[hahahahhaah]

Everyone wants to park some money and have other people work hard to increase the real value of said parked money. Not everyone can win big. Storing value is actually pretty amazing thing and that it can be profitable is magic. Of course the environment and poorest pays some of the free lunch.

[Mountain_Skies]

An investor friend once told me that the US needs to always be in debt because treasuries give investors a risk-free place to park their money between investments. The sense of entitlement was astounding.

[lametti]

I don't think this is necessarily entitlement. There are heteredox but popular economic theories (such as MMT) that view public debt issuance at least in part as a method to satisfy the demand for private savings.

[positr0n]

That sounds like just describing the way the current global system works, not entitlement.

Transitioning to another system would work (and seems inevitable at some point in the next hundred years??) but oof it would be chaotic.

[agobineau]

it really depends on whether or not there is a global capital shortage. this is very easy to do when the economy requires much more capital than is available. and in the inverse, it is self explanatory

[Rastonbury]

There is no 'cure' per se as a non-US investor currency risk is just something to accept (or swap return for a hedge but then it ends up being a wash mostly), for example if you invest in a World equities ETF, it's a bit pointless to be hedging exposure to all the currencies. Even if you decide to slant away from the US, it's likely a majority of non-US large caps have USD exposures.

It's more a psychological thing, you see absolute USD return and think you could've made that but there's not the actual return, your actual return is post conversion, if you'd have hedged you wouldn't have that abosulte return either, so you've never had it.

Additionally, if you're like most people and investing regularly or DCA-ing from now on you can buy at lower USD

[ambicapter]

Is absolute USD return being lower than “actual return” (not sure what that is measured in) an issue if you stay in USD your whole life?

[Rastonbury]

Actual return is for non-US investors having to convert back to say Euros for retirement, after having the dollar weaken, you get less Euros for example

[baxtr]

No but your USD return gap should in theory be eaten away by inflation.

[dgb23]

Many global indexes are also traded in USD.

Ironically last year has been good for those who held EUR based or CHF based indexes.

[baxtr]

Still not helpful if you need to pay your bills in EUR?

[swexbe]

> indicies that usually do not perform that well

MSCI EM has outperformed MSCI US since it's inception in 2001 if you look at total return.

[epolanski]

Small caps and emerging markets in the long run should outpace advanced high cap markets as they have more room to grow.

There's also some other interesting aspects of emerging markets specifically: they never went more than 4.5 years before recovering from a crash to ath, whereas it took the SP500 12 years and EU 600 index 14 to recover from the 2000 one.

[Retric]

Google etc may be a US based company, but they can leverage emerging markets just fine.

There’s a stronger argument to be made for small caps, but stock buybacks allow any company’s stock to effectively experience exponential growth even with flat earnings. IE there’s little long term difference between buying back 2% a stock every year and ~2% actual growth every year assuming you never hold the majority of shares. (as in 1/0.98 ~= 1.02)

[epolanski]

> Google etc may be a US based company, but they can leverage emerging markets just fine.

Not sure what are you trying to say.

[Retric]

You’re buying stock in a company not a market, and a company doesn’t need to be based in a country to profit from that country.

Plenty of companies listed on foreign exchanges make the majority of their money from the US market etc.

[epolanski]

You can buy "into a market" by investing in a ETF following the MSCI EM or SP500. In any case not sure what's your point about single stock companies in a discussion about market indexes.

[rsynnott]

> You’re buying stock in a company not a market

I mean, we're talking about index funds, where you essentially are buying a market.

[miroljub]

That logic is flawed. The end value and ROI for S&P500 is the same regardless of the currency used to display it.

It's the same as complaining that the temperature increased more in Fahrenheit than in Celsius.

EDIT: The total value is the same regardless of the fluctuations of currencies used to represent the value. Those are two independent issues.

Currencies fluctuate even if you keep them in checking accounts without investing them.

And yes, if you measure distance in feet, your son will go every year further away than you because his feet keep growing, while yours stay the same.

[lbreakjai]

The logic isn't flawed. If you are a European investor, then you care about the returns in your currency, and the fact is your pile of money only grew by 4%.

Inversely, as a US investor, if you invested 100€ in the eurostoxx 50, your pile of money would have grown to about $140 (20% index growth, 15% dollar debasement). It absolutely makes a difference, that's $20 more in your pocket compared to the index.

Your comparison with temperatures is wrong. Celsius and Fahrenheit are fixed units, whereas the value of currencies fluctuate.

[mlrtime]

It is flawed because it's conflating two different independent variables. It's also looking for a specific weak point where there is none, more as if it is trying to state a narrative.

If you want to talk about EURUSD then just state it.

[cjpearson]

It makes sense if you're looking at it from the perspective of a European investor. e.g. You start with 1000 EUR, convert and buy into an S&P500 fund, wait a year, sell and convert back to EUR.

Celsius and Fahrenheit doesn't work as an analogy because the rate does not change over time as it does with currencies.

[xvedejas]

I think it depends on whether you're planning on holding it in currency or using the currency to buy other things. Does the cost of material goods and services mostly stay the same in EUR, or does it somewhat follow the S&P? If more the latter, then converting to EUR is just a very temporary exchange and its nominal amount doesn't exactly matter.

[embedding-shape]

> Does the cost of material goods and services mostly stay the same in EUR, or does it somewhat follow the S&P?

I don't understand this question, are you asking if material goods and services in Europe, which uses EUR, "somewhat" follows the S&P, a US stock market index?

[mlrtime]

If you have to hold USD to buy and sell USD products (as a European) it doesn't make sense to compare your SPY position vs EURUSD because you have to use those USD to buy something or pay some debt.

[rsynnott]

> If you have to hold USD to buy and sell USD products (as a European)

Approximately no individual does this. Some companies may hold some foreign currency reserves, but even there it is not _particularly_ common in most cases.

As a European, I have never, in 40 years, had any USD, except a small amount of paper currency. If I'm buying something made in the US, I'm probably buying from a local vendor, or else will convert on the fly. If I'm visiting the US, I'll convert on the fly (this is even cheap, now, thanks to neo-banks). I own a bunch of US equity, but indirectly via a euro-denominated global market index fund. This is fairly standard. In general it's only common for individuals to hold foreign currency where the local currency is particularly unstable.

[embedding-shape]

> If you have to hold USD to buy and sell USD products (as a European)

Do people do this? Up until some months ago, I was heavily invested in some US companies, and I never actually held USD in my accounts at any point. I used EUR to buy those stocks, the conversion happening together with the purchase, and same thing when I sold them, I received EUR ultimately.

I know I could have another account in my bank with USD set to the currency, I just don't know why'd anyone would want to, when you can convert at the point of sale/purchase. Of course, if you're doing forex trading or whatever, that might make sense, but I don't think generally people hold USD to buy/sell US stocks, because you don't have to.

[yorwba]

It is not common for Europeans to hold USD to buy and sell USD products.

[nbadg]

I mean, for retail investors outside the US, the question you're asking boils down to „does purchasing power parity follow popular US domestic market indices?“, to which the answer is a resounding no.

There may be some offset for goods imported from the US, but that's a minority of consumer goods globally, and even then, the purchase currency will usually still be the local fiat, and then the attractiveness of the US index fund still has to be weighed against the performance of non-US-based indices in that same local currency as opportunity cost.

[rsynnott]

> Does the cost of material goods and services mostly stay the same in EUR, or does it somewhat follow the S&P?

... Wait, why would you expect the price of goods to follow the valuation of, well, any market index, never mind one specific foreign market index? Like, I don't understand why you think that would happen. If anything, you'd expect a minor inverse relationship, at least on a global scale; rapid growth of cost of goods indicates inflation, which implies central bank tightening, which tends to depress stock values a bit.

[rsynnott]

Also an American investor, really; an American investor who'd pulled out of S&P and moved to Eurostoxx at the time would have made something like 40% in their local currency (about half of it due to the decline of the dollar).

[ciconia]

This analogy is flawed. The conversion formula between Fahrenheit and Celsius is fixed. Not so for currencies.

[mlrtime]

They are two separate issues, you don't look at the returns on SPY vs every currency.

[Ekaros]

If you are in USA and invest outside USA. Do you look at returns in USD or in nominal value of the market you invested in? Say there is hyperinflation where you invested. You should be extremely happy. After all the nominal value of your investment is massively up. Even if USD value is now fraction...

[Pooge]

If you are outside the USA, then you absolutely do. Returns are denominated in the base currency but it doesn't paint the whole picture.

[dranudin]

The roi is unfortunately not the same if you earn your money in euros and need to pay your taxes in euros. At one point one has to do a forex trade and that will be a loss for the euro investor

[rwmj]

Only if you convert it at a loss and are unable to wait for USD to recover. If (and it is, admittedly, a big assumption) we assume that USD and EUR are broadly stable currencies over the long term, then short term changes in the ratio don't matter for long term investors. You're buying a share of productive capacity, the currency it is listed in doesn't matter.

[jacquesm]

Only if you convert it at a loss and are unable to wait for USD to recover.

If you need to wait for it to recover you have lost money.

Besides, who says it will recover?

[Dylan16807]

It's reasonable to assume they're broadly stable, but being broadly stable doesn't mean a drop will "recover". There's no specific ratio that the currencies are being pushed to. Permanent changes in the baseline can and do happen.

> You're buying a share of productive capacity, the currency it is listed in doesn't matter.

But I don't own a fixed percentage of production, I own a fixed number of shares and the number of shares can change. If the number of shares doubles, then my investment is worth half as much.

[rwmj]

> But I don't own a fixed percentage of production, I own a fixed number of shares and the number of shares can change. If the number of shares doubles, then my investment is worth half as much.

How is that related to currency changes? That can happen anyway regardless of the currency.

[Dylan16807]

It can happen in other situations, but the fact that it always happens with currency fluctuations is what's important here. When the dollar loses value, everything I own that's anchored to dollars loses value too. "buying a share of productive capacity" implies a counteracting effect, but there isn't one, because the amount of productive capacity represented by each share shrinks too.

[dgb23]

This is correct. A decent example would be comparing the CHF, EUR, USD over the last few decades. The CHF is to the EUR what the EUR is to the USD.

[compsciphd]

yes, but could one also argue that due to currency weakening, the S&P's growth can simply be due to the weakened currency?

If I can say something has an "absolute" value of X, but I denominate it in USD, which is normally 1:1 to X, then it's value in USD in X.

but if USD drops to being worth half an X, but its absolute value hasn't changed, it will now appear to be worth 2X in USD.

so why can't one argue, if the dollar weakened by 15%, but everything else being equal, one would expect dollar denominated stocks to appreciate (in dollars) by the same amount? And if the dollar would strengthen, we would expect the stock price to depreciate?

[mlrtime]

Because the SP500 is a better indicator of the market than USD. Also if you look at the global dollar index, it is right at par historically.

The companies in the 500 are mostly global companies, if the USD shrunk so much they would either be losing money, or it doesn't matter because the US market is so strong it dwarfs the others.

[piva00]

> The companies in the 500 are mostly global companies

Isn't that saying exactly what the parent comment mentioned? Since those companies are global, the growth of the S&P 500 which is USD denominated will track the devaluation of the USD as the underlying companies haven't lost value, the dollar has, and the S&P 500 would track that as growth in percentage to balance it.

I don't understand why they would be losing money since as you said they're global, and more untethered to the USD than the S&P 500.

[matwood]

The USD and EURO being nearly on par was the exception. And given the current admins stated goals, I’m not sure we’re going to see the USD strengthen anytime soon. In fact, it’s more likely to get weaker.

[rsynnott]

> If (and it is, admittedly, a big assumption) we assume that USD and EUR are broadly stable currencies over the long term

Yeah, er, that's a very big if. There's no real reason to assume that, and history doesn't really bear it out.

If anything in the near term you'd probably expect the USD to weaken further vs the Euro; Trump seems _very_ keen to install a fed chair who'll cut rates even where not supported by inflation and employment numbers, whereas the ECB is more disciplined and less subject to political interference.

[KK7NIL]

You're the one making a big assumption: that this is a short term movement in the dollar.

Trump has made it clear he wants a cheaper dollar to make US exports more competitive and JPM is forecasting another 10% drop in the value of the dollar this year.

Just because the dollar and euro have been roughly level for over a decade doesn't mean that will remain true, currencies often go through pretty fast changes in relative values every few decades as their financial and geopolitical positions change. The pound drop around 2007~2009 is a good example of one such sudden but long term price shift.

[jacquesm]

> That logic is flawed. The end value and ROI for S&P500 is the same regardless of the currency used to display it.

> It's the same as complaining that the temperature increased more in Fahrenheit than in Celsius.

No, that logic is flawed. Fahrenheit and Celsius are pegged to each other, the Euro and the USD are not.