Question regarding currency fluctuation

Ixel

With more Brexit uncertainty or such ahead, I'm having a little concern regarding the GBP / USD currency change. Right now it's potentially inflated ever since the referendum, meaning anyone who had investments involving USD from GBP (that weren't hedged) would've seen an increase in value.


Now, my slight concern is the year ahead at the least. I wasn't fortunate enough to get into the stock market before the pound plunged, so my investment isn't really inflated by that - if that makes sense. I'm wondering if the wise option would be to switch to a hedged investment for now, or at least in part, assuming the pound doesn't really drop much lower and does infact start to rise. I guess what I'm looking for is some other opinions on my scenario and what you'd potentially consider or not consider if you were in my shoes?


I'm invested in a VWRL and VWRP ETF's currently.


Thanks in advance.

DiggerUK

FX fluctuations between USD and GBP has nothing to do with Brexit, the Labour leadership election, or Love Island.

At the moment the base rate in UK is half of the US base rate. This skews the advantage for UK funds to make a small margin on a simple carry trade to take advantage.

Trump made a backhanded complaint about the situation in his Davos speech when he complained that the Federal Reserve had "raised rates too quickly and has lowered them too slowly"......I think his main swipe was at other central banks who have zirp or negative rates, and he said as much.
I do see room for change with two new appointments to the Federal Reserve Board, but let's wait for now.

You're situation is advantaged and disadvantaged at different times..._

sevenhills

Ixel wrote: »

I'm wondering if the wise option would be to switch to a hedged investment for now, or at least in part, assuming the pound doesn't really drop much lower and does infact start to rise.

Boris has a large majority so he can end any uncertainty, we all hope that he will make choices that means our currency will strenthen.

steampowered

sevenhills wrote: »

Boris has a large majority so he can end any uncertainty, we all hope that he will make choices that means our currency will strenthen.

I honestly don't understand why people associate the Conservatives with a good exchange rate.

The evidence points completely in the opposite direction. The pound was riding high at 2:1 against the dollar for much of the last Labour government. The pound was lower during the Cameron years. It plunged during Cameron's second term. And it lost about a third of it's value again under May/Johnson.

kuratowski

I’m going to ignore the politics here.

By holding some investments denominated in USD (and other currencies) you will gain when the pound falls, which partially offsets the loss to your overall GBP denominated wealth (in terms of purchasing power), assuming that is like most Brits your house and cash and other assets are all priced in GBP. And conversely, when the pound strengthens your overall wealth will increase, and the relative fall in value of your investments in USD (and other currencies) will just partly balance that. So holding some assets in other currencies acts as a hedge and reduces the overall volatility of your wealth. If you were to hedge out the currency exposure it would cancel the effect, thus concentrating your exposure to the pound.

Ixel

Thanks all for the responses.

So, if I'm understanding correctly I should pretty much not worry too much about it. My main concern was that if the trade talks and such were somewhat a success the pound may strengthen a lot (going back to pre-referendum levels, for example?) and therefore my current VWRL and VWRP investments would I imagine drop a lot. As I didn't really originally gain from the pound losing strength, as I wasn't in the stock market back then, that is why I was a bit concerned with the year ahead around Brexit's possibly positive progress potentially. Hope that makes sense.

I don't own a property, my only true GBP asset is what's in my bank accounts and my wallet.

Malthusian

Ixel wrote: »

My main concern was that if the trade talks and such were somewhat a success the pound may strengthen a lot (going back to pre-referendum levels, for example?) and therefore my current VWRL and VWRP investments would I imagine drop a lot.

But after you convert them to Sterling they will buy more of anything made outside the UK, i.e. almost everything, leaving you in largely the same position.

As I didn't really originally gain from the pound losing strength, as I wasn't in the stock market back then, that is why I was a bit concerned with the year ahead around Brexit's possibly positive progress potentially.

The obvious conclusion is that you shoudn't lose any more money from hanging around second-guessing yourself.

I don't own a property, my only true GBP asset is what's in my bank accounts and my wallet.

Is changing that worth considering? The tax breaks on owning your own property are exceptional.

Ixel

Thanks for the reply.

Regarding the sterling conversion, that's a good point as I hadn't really thought of it like that .

I've thought about buying a property a short while ago but to feel somewhat comfortable I'd ideally want to be able to pay outright around 70% to 80% of the property's cost, especially to help minimise my chance of a declined mortgage for the remainder. Right now I could probably deposit around 45% to 55% of the cost of an average priced property (house/bungalow, not a flat, and not shared ownership) in the area I live in. That's accounting for what's invested and currently available via my S&S ISA, Lifetime ISA and Fund & Share, but not my emergency fund or other bank accounts of course (which is about £15k, whereas I have over £110k invested in the stock market currently).

For the moment I'll stick with VWRL and VWRP as a long term investment, until I reach the intended goal above at least and assuming it's not during a downturn.

MaxiRobriguez

I wouldn't pay that much attention to currency fluctuations when making your investing decisions.

UK productivity is cack and a hardish Tory Brexit may cause GDP to slow or reverse, it could also cause inflation spikes which might be met with central bank interest rates...

Too much is unknowns so for me it's just easier to stick to what you would have invested in regardless of currency. I'm still buying foreign investments, I'm also still buying some targeted UK stocks.

quirkydeptless

I did a big shift from actively managed funds to index tracking ETFs at the end of last year (just before the UK election). This very dilemma was holding me back for ages from doing this, deciding which ETFs to go for, to Hedge, or not to Hedge...

Sage advice from my extensive research (OK, I googled a bit) leaned towards not hedging as you've got no idea if the future is better for the pound or the dollar, but there is one certainty, and that you have to pay a smidge extra for the hedging, so over the long term, not worth it. Short term maybe, but then that's like market timing.

In the end, I decided the only way for me to JFDI was to go 50/50 hedged (IWDG) /non-hedged (VWRP)

Also couldn't decide whether to go all-world or developed world, or to have distributing or accumulating ETFs, or to go with Vanguard or Blackrock, so went 50/50 on that too

P.S. I did 100% hedge my bonds though.

P.P.S. This was just for my ISA, I left my Pensions alone.

seacaitch

In another thread you mentioned you're early 30s, and as such you'd (hopefully) expect to be investing additional new money for a lengthy period of time, maybe a few decades or so...

Over that period you'll experience an ever-changing sequence of exchange rates that you'll be purchasing overseas assets at, or purchasing domestic assets at whose cashflows and therefore price are also influenced by fluctuating currencies. Forex is just another variable affecting the prices that you'll be "£-cost-averaging" into over the decades ahead.

You have no influence over those forex rates nor any idea what they'll do next. Will it be two $ to the £ in 15 years time, two £ to the $, or something else? The best we can say is that current rates represent the world's aggregate view of where those rates should be today, taking account of all known information, future forecasts, etc etc.

When investing, rather than burning much mental energy on things you can't control I think it's generally more productive to focus your efforts on the things you can influence:
- so think about how perhaps you can earn more money, save/invest more, and reduce your investment costs and fees;
- develop a written down long term investment "plan", evolving over time, that attempts to realistically map how you get from where you are today financially to where you eventually want to be;
- attempt to gain some appreciation of investment market and asset price history so that you're somewhat mentally prepared for those future times when markets become very volatile and frightening, which may/will make you vulnerable to abandoning your considered investment plan at the worst time.

Hopefully, you're going to be investing for a long time: accumulating assets for a few decades, then drawing them down for a further few decades. If you're planning to be a buy-and-hold investor in order to gain the financial rewards of holding stocks etc over the long term then you've no choice but to get used to the idea that the prices of assets and currencies will move all over the place during that time, and you've little choice but to get used to the idea, "let go", and ignore it.