Global investing involves a multitude of factors that impact your portfolio in different ways. One of those factors is currency exposure. Volatile markets can create a significant amount of uncertainty, especially with the global COVID-19 pandemic we are currently experiencing. As an investor who has exposure to various global equities, it’s important to understand currency hedging as one of the common investment strategies to protect your assets and benefit your portfolio. These considerations can help you understand the impacts of global equity exposure and the value currency hedging brings to your multi-asset portfolio.
Understanding Global Currency Exposure
You’re exposed to exchange rates with currency in investing just like you would be if you traveled internationally. Any type of bond or stock your portfolio has outside of the country exposes you to the currency of that particular country. While creating a diverse portfolio is ideal for growth investing, investors are sometimes surprised at how impactful currency exposure can be, and it’s often not a pleasant surprise.
Currency Exposure Creates Exchange Rate Risk
One of the most solid investment strategies for a global investor to use is a forward exchange contract. This strategy helps manage exchange rate risk by hedging currency exposure. Most global investors want their income and return to be converted to their home currency. However, by doing so they are exposing themselves to exchange rate risk and the potential for major losses. It’s not always a guarantee the exchange rate will lead to a negative scenario, but the risk will be present any time you deal with global investments.
Currency Hedging Can Provide Protection In Volatile Markets
The best investment strategies consider market volatility, but some volatile markets simply can’t be predicted. Take the COVID-19 pandemic as an example. It created immediate volatility worldwide that could last for many months or years to come. Some countries may recover quicker than others, which makes global growth investing extremely challenging. Many experts believe markets will stabilize at some point, but it’s still important to consider currency hedging for an added layer of protection to your portfolio.
Investors can view currency hedging as a form of insurance to limit the potential negative impact of international exchange rates. Currency hedging means entering into a contract to protect assets from anticipated or unexpected changes in exchange rates. While it can be a great form of protection, it doesn’t always equal the greatest result when it comes to maximizing your investment strategies. Many investors used the currency hedging strategy when COVID-19 began making the news, which has provided some peace of mind amid the unknown aspects of the global crisis.
Stock Investing Info helps investors manage their global, multi-asset portfolio and discusses various strategies to ensure the appropriate amount of risk is taken based on your risk tolerance. The COVID-19 pandemic has created a lot of uneasiness in many global investors. Sometimes talking through different options and investment strategies can provide some peace of mind. Click here for more Stock Investing Info.