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Should foreign exchange be a part of my portfolio?


Chances are it already is. If you own foreign stocks or stocks of American companies that do significant business overseas – which these days means almost every large company – then currency movements are likely to influence your returns to some degree because they influence the profitability of the companies you invest in. Many factors determine the impact of currency movements on investment performance, but when a country’s currency is strong, it’s likely to improve returns for shares of domestic industries like utilities or retailing. A weaker currency generally enhances returns of export-oriented manufacturers and the tourism industry because their products and services are cheaper for foreigners.

As for investing directly in foreign-exchange markets, say through exchange-traded funds focusing on currency derivatives, if you’re a sophisticated investor and you’re aware of the impact of currency fluctuations on other parts of your portfolio, then you might use these instruments to hedge your exposure if you anticipate adverse movements. It’s probably more trouble than it’s worth for most investors, however, especially those who have built their portfolios with long-term growth and value in mind.

-Conrad de Aenlle