A strong US dollar has been terrible for the returns of international funds. If you’re thinking of giving up on those funds, now is probably a bad time to do so.
Like markets, currency exchange rates rise and fall over time. Right now, the US dollar is rising. At some point in the future the dollar will peak versus other currencies, and eventually fall. Anyone who sells now, will kick themselves for missing out. Why? It’s no different than selling after the stock market falls. Selling at the bottom rarely turns out well.
International fund returns have two components – stock returns and changes in currency rates – because international funds carry the returns of the foreign stocks along with the currency changes between the dollar and the respective countries currency.
It’s the same process as buying stuff while you’re on vacation in a foreign country. Your dollars get converted to the local currency of the country you’re in. Only you buy stocks instead of stuff. When you sell those stocks, you convert the money back into dollars. The difference in the exchange rate between when you bought and when you sold factors into your overall return. Over a long enough timespan, the effect of changing currency rates tends to even out.
While foreign stock markets have done well in the past year, the rising US dollar dragged down those results for US investors. Stock returns being equal, as the dollar falls, the returns on foreign stocks rise an equal amount and vice versa.
Because of this, I’m looking to put some money into country specific international funds to take advantage of the extreme dollar valuation. I want the lowest valued countries, with decent dividend yields (so I’m paid to wait), affected the worst by the rising dollar.
StarCapital has a nice tool for market valuations by country. This post has a break down of the worst performing countries by currency, along with some possible risks to consider. And dividend yield is easy enough to find for any index fund.
The low valuation should offer a nice return over the next few years. And if/when the dollar falls, I’ll get a little boost on the return.
Keep in mind, I’m not trying to time a top or bottom in currency rates. The dollar could rise further and hurt my returns. The goal is to take advantage of mean reversion in low valuations i.e. chasing worst performers. The currency rate is one more point to consider and a bonus if it works out.
- What The Record Plunge In The Euro Means For Investors – D. Lyons
- Diversification Is the Sane Alternative to Betting Big on One Investment – C. Richards
- Surprise: Your Broker Doesn’t Work for You – Marketwatch
- Should We Worry About a Bond Bubble? – R. Shiller
- A 3-D View of a Chart That Predicts The Economic Future: The Yield Curve – The Upshot
- How to Survive a Bear Market – WSJ
- Cheap or Expensive? The One Thing About Equity Valuation that Few Talk About – Humble Student of the Market
- A Guide to Not Retiring – WSJ
- The East India Company: The Original Corporate Raiders – The Guardian
- The Fuzzy, Insane Math That’s Creating So Many Billion-Dollar Tech Companies – Bloomberg