Super Strong Dollar Not Good for Foreign Investments

Many investors have a slice of their investments in international stock mutual funds. That is part of a diversified plan. True diversification is built by owning assets that move in different directions. We tend to not focus on the why’s, but rather look at the bottom line, “did I make money?”

Don’t react to short-term currency volatility

short term returns graph

With the dollar getting super strong compared to most currencies, it negated positive stock market returns in foreign countries because of the returns in the weakening currencies. In other words, if you were an investor in the European stock index as a European you enjoyed the gain of 4.7%. As an American investor with share prices in dollar denominated current, you lost 6.2% last year.

Keep in mind that the opposite impact will be in play when the dollar weakens against different currencies.

On a positive note, the super strong dollar makes this a great time to travel overseas.

One other trend I wanted to point out is that the U.S. stock market (as compared to other investments) tends to move in and out of performance patterns. As you can see from the graph below U.S. stocks have been doing very well compared to other investments over the past 6 years. This is following a period when the U.S. stock market under performed from 2001-2007.

I can’t tell you when, but it is likely at some point, the U.S. market will have a slump compared to other investments. This is why we stay diversified.

A Reason to Diversify: Market Leadership Rotates

excess return vs asset classes

 

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