Long Term Investing in CurrenciesCurrencies usually are not financial instruments which typically come to mind when talking about long-term investments. Vast majority of economic advisors suggests a mix of bonds and stocks to their clients, with some cash investments, like money market funds or CD's thrown in the mix. Such is traditional, conventional wisdom regarding regarding allocating money for a haul and is also almost universally practised on "main street". The only difference is specific split among these asset groups, generally linked to the age of person. Virtually all other designs of investments are viewed "derivatives" instead of ideal for most people.
These views happen to be slowly changing over previous few years, otherwise decades. Explosion of hedge funds have brought alternative varieties of investments, aside from stocks and bonds, into a vernacular on most individual investors. Today almost everybody with any desire for markets knows, a minimum of in principle, what options, futures and commodities are. More and more often these groups of securities are mentioned as separate asset classes with a place of its in a very carefully balanced investment portfolio. Same costs currencies.
Popularity of spot Forex trading proves that currencies are fantastic trading instruments. Brokers report record amounts of accounts opening annually, trading volumes keep rising along with the most liquid markets on the globe have grown to be even deeper. This is easily noticed when spreads from just couple of years ago are in comparison with ones today. In many cases these were cut by half, clearly results of increased activity along with competition for clients among Forex brokers.
One in the characteristics of currencies often discussed may be the presence of unusually long and persistent trends. They often last months and years and would be the main reason behind inclusion of them into main asset classes. But really, are currencies the kind of financial instrument that could be let go of for an indeterminate period of time without approximately active portfolio management? Long term chart of any one currency pair indeed reveals long-term trends, but exactly how should it seem like on bases of currency baskets, a thing that must be accomplished in order to lower risks associated with a one currency exposure? Things get yourself a little different than.
This can be a chart of how major currencies performed against a gift basket of peers since 1970. It was compiled and published recently by Financial Times ( Rates used were trade-weighted exchange: "showing the need for a country's currency with regards to the currencies of the group of countries in which it trades. In the index, each country's currency emerged an importance in relation to the amount of trade it does". Another way of valuing currencies is with Purchasing Power Parity Index. Using trade-weighted exchange we can easily see which currencies outperformed, or underperformed, based n a similar criteria. This chart is a little crowded, but individual currencies could be isolated.
The more effective currency over the period, as measured using trade-weighted exchange, has become Swiss Franc. From 1970 to about 1995 it's nearly doubled in relation to other currencies included here. Since than, however, CHF may be declining slightly. One could generously refer to it a sideways move. All told, over almost forty years time period this currency gained about 80% against a basket of currencies of its major trading partners. These are not stellar results, especially since last 15 approximately years produced netting loss.
The US Dollar continues to be falling in value although not as dramatically together may have thought. As a matter of fact USD had number of prolonged periods of appreciation, lasting years. Over the span protected by data you could even call the Dollar a non-performing, or slightly under-performing. However, it was not a currency which should are already an option for anyone seeking long term gains.
One more currency which continues to be in the news a lot lately, Australian Dollar. Here also results are rather disappointing. Even at the height of commodities induced appreciation with this decade, AUD was only about 40% higher in value against other currencies that on the beginning on this data series, in 1970. Also not the type of performance you are likely to expect after 40 years.
This table doesn't include all kinds of other variables, which would have profound effect on total asset return do your best. Interest rates collected on anybody with the currencies might have boosted benefits dramatically. Any compounding of these gains can also be not included. However, apparently prolonged trends, one of the most appealing factors for currencies investors, can also be worst enemies when simple buy and hold approach is utilized. Currency of could be for the loosing side of market swing for years and even decades.
What will be the answer? Are currencies a suitable asset class for long lasting investment? Probably not for that static buy and hold approach, long favored with stocks and bonds. While finer points are invariably debatable and ready to accept discussion, some level of activity will be necessary to be able to take advantage of both currency appreciation and interest rate earning potential. It does not mean daily, but once every few months analysis and necessary adjustments should be done. That way individual currencies might be held for long periods of time. Just not inside a "set and forget" manner.
Mike K.