(1 min read time)

We're going to get a little bit heavier this month but bear with me, it will be worth it!!

We all know that as the Australian dollar goes up, overseas travel and imported goods get cheaper and correspondingly as our Aussie dollar goes down they get more expensive.

Over the last 12 months we have seen a significant reduction in the Aussie dollar (AUD) from almost $1.10 USD to around $0.75 USD. We all agree, it's bad for overseas travel and buying that new television, fridge, car or any other imported goods.

However, what many investors fail to recognise is that changes in the AUD will also have a significant impact on their International Share portfolios investment returns. Quite simply, the AUD goes up, our overseas investment returns go down and correspondingly as our AUD falls, our overseas investment returns increase.

The table below really shows how changes in the AUD impact International Shares investment returns. In the last 12 months currency changes increased International Share returns by 14.29% but over 10 years they have reduced annual returns by almost 2.0% p.a.

Hedgedunhedged

At this stage, most people ask, "How do we limit currency risk and participate in some of the upside potential but limit some of our downside risk?"

Well, it is possible to use investments which currency "hedge", which in simple terms means they remove the effects of currency from the portfolio. We must be careful though as we don't want to necessarily remove all currency effects!

Using some currency hedging can be just another simple way to further diversify an investment portfolio and lower the potential risk.

Finally..... the moral to this story is, we are in a complex world which is becoming more complex by the day. However, with the right advice, it is possible to devise simple strategies to address complex problems.

Have a great month.

Cheers,
Ben Law.