Investing in currencies


Efficient-market research conducted on exchange rates found the same random walk phenomenon as found in the stock market. Exchange rates move unpredictably. Currency exposure tends to increase the volatility of a portfolio and this is especially true in the bond markets.

While there is no reliable evidence to suggest that the expected return of exchange rates (assuming monies are invested in short-term currency deposits) is generally anything other than zero. Our belief is that currency exposure should be hedged in global bond portfolios. Generally, investors pursue global portfolios in order to diversify. Statistically, diversification should result in a lower portfolio volatility due to the combination of uncorrelated assets. If volatility is increased with the addition of global assets, the whole purpose of international diversification is defeated.

GoldCore Wealth Management created an equally weighted portfolio of 12 currencies from 1970 to March 2010 and compared the performance of this with US Treasury Bills and Government Bonds.

The average annual return for the currency portfolio was typically around 1.45%pa compared to 5.66%pa for Treasury Bills and 8.63%%pa for Bonds. This lends support to the notion that investing in currencies carries risk but not the expectation of a positive return.

Please click on the image below to review the study.