We live in a global world so it is important to study the potential global risks to your investments. Many investors around the world have seen their currency fall in value. Countries that rely on exporting commodities, Russia, Australia and Canada to name just a few, were hit hard in 2014. The demand for commodities has been weakened on two fronts, slow world economic growth plus a strong U.S dollar. In simple terms, the strong U.S. dollar, is like going to a clearance sale with lots of products but the price keeps on going up every week.
Most investors neglect to take into account currency risks within their investments. Prior to the financial crisis governments would increase spending or cut taxes to help economic growth. High government debts in most countries around the world has put pressure on Central Banks to stimulate the economy by devaluating their currency. The Fed has stopped Q.E. and there is talk of raising U.S. interest rates in 2015 which could add more pressure on other currencies.
Most consumers are happy with the fall in oil prices but they pose a huge risk to their bond investments. Drilling for oil requires big capital spending which is funded by selling bonds and oil futures. Many small companies are going to go bankrupt if oil prices don’t go back up. Banks and hedge funds who bought bonds and oil futures are going to lose a bundle.
Default Risks on Foreign Bonds
Greece elections are coming up, a new government could decide to leave the Euro Zone making Greek bonds worthless. Oil producing nations like Venezuela and Russia could default on their bonds if oil prices don’t go back up.
- Reduce your bond exposure
- Check to see if your ETFs or equity mutual funds have a currency hedge
- If you live outside the U.S. convert your cash into U.S. funds
- Delay investing and keep some cash on the sidelines
- Get defensive – a crisis in the bond markets will cause stock markets to fall just like 2008
- Don’t try to a catch a falling knife, avoid oil stocks which are getting cheaper every day.
- Reduce your exposure to emerging markets because they have debt in U.S. funds and a stronger U.S. dollar will increase their debt and interest costs.
I suggest even if you are young, in your 20’s & 30’s, boosting your investment returns could reduce the amount that you will have to save for retirement.
I am going to say it again “money has no flag and no country it only seeks higher investment returns”! I have never traded currencies on the forex market and I am not a currency expert by any means. But last year, both the Euro & Yen fell against the U.S. dollar. The fall in oil prices will be deflationary which could lead to even more Q.E. A bond crisis will cause money to seek a safe haven which is the U.S. dollar and U.S. investments.