By Karen Haywood Queen
The dollar is on a roll. While its surge in value compared to other currencies is good news when you travel overseas, it might not be the best thing for your investments. So, to understand how to deal with currency volatility when it comes to your retirement portfolio, here are some key things to consider.
The U.S. dollar has been trending up since July 2014, said Alan Robinson, vice president and global portfolio analyst at RBC Wealth Management. Because of the greenback's strength, returns on U.S.-focused equities have outpaced returns for equities in companies that do business globally, he said.
“We feel investors are becoming over-focused on the detrimental effect of the rapid rise of the dollar and are pulling out of positions in multinational-focused stocks," Robinson said. “That may not be a wise move."
In fact, U.S. investors, some of whom have low stakes in international stocks, may want to consider increasing their stake in global equities. That way, they'll be prepared to benefit both when the dollar inevitably begins to weaken and as global growth continues.
How does a strong or weak dollar impact the U.S. companies in your retirement portfolio?
For U.S. manufacturers that export goods overseas, a strong dollar means these companies are paying their workers in highly valued dollars while collecting some of their revenue in weaker foreign currencies, said Till Schreiber, senior lecturer of economics at the College of William and Mary.
This works both ways. When the dollar is lower, U.S. companies pay their workers in weaker dollars while collecting some of their revenue in comparatively stronger international currencies.
"A weaker dollar—not necessary a weak one, but weaker than today's—helps U.S. exporters, for example, car manufacturers," Schreiber said. "Our cars made in the United States could either be priced lower abroad, or at the same price in foreign currency and return more dollars."
Global Exporters Protect Themselves Against Dollar Fluctuations
U.S. companies doing business overseas may take a financial hit when the dollar is strong and then benefit when the dollar is weak. But major U.S. corporations have their own currency strategies—executed by experts more experienced than even many sophisticated investors—to maximize returns and lessen the impact from fluctuations. These corporate hedging programs are designed to protect the blue-chip stocks in your portfolio from the adverse effects of currency volatility.
“Don't get too hung up on currency values," said Michael Brandl, associate clinical professor of finance in the Department of Finance at Ohio State University. “Let the companies deal with their own exchange risk internally rather than trying to hedge in your own portfolio. They can manage that much better. They've got much more granular data—information on just how big that exchange risk is over what time period. You're not going to have knowledge of that."
Strong Dollar Cycle May Be Ending Soon… Or Not
Currencies can be highly volatile, so making changes to your portfolio in reaction to the dollar's current valuation may not help you in the long run. “Historically, these bull dollar runs last six to eight years. We are perhaps four years through this cyclical dollar rally," said Robinson. "The dynamics of the market are changing."
When the dollar eventually weakens compared to other currencies, multinational companies will see comparative gains, he said.
Currency cycles are also notoriously difficult to forecast. “Trying to predict currency movements, trying to anticipate changes in exchange rates are like trying to herd cats," Brandl said. “We as economists have difficulty even trying to look backward to explain movement in currency values—much less trying to predict [future] movement."
Invest Globally To Achieve The Right Asset Mix
Beyond the dollar, a higher stake in global companies can give investors an opportunity to benefit as other economies grow faster than the U.S. economy.
“What we've seen in the United States since the 1950s in terms of economic growth, we're now starting to see elsewhere in the world," Robinson said. “China is pivoting from being an exporter to focusing increasingly on infrastructure and the consumer. In these quickly growing countries, you can harness faster growth because a lot of these markets are relatively undeveloped."
Don't worry so much about the volatility of the exchange rates, he advised. Instead, make sure your portfolio is diversified globally.
Think long term. “I'm not buying a company for its sales today," said Richard B. Evans, associate professor at the Darden Graduate School of Business at the University of Virginia. “I'm buying it for its aggregate sales over the next five to ten years."
A strong retirement portfolio that's diversified, both globally and across different asset sectors, can help keep your portfolio growing in the long term—no matter how the dollar moves.
Karen Haywood Queen covers personal finance for a variety of national publications.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
