What Can Investors Do About The Dropping Loonie?

As a Canadian you’ve noticed how fast our dollar has fallen in recent months.  Between that and oil prices, there is not much else to talk about.  Except maybe housing and real estate prices!  Back to the dropping loonie you might be thinking “how can I take advantage of this?”

One option you might be looking at is currency-hedged index funds. They were once a popular choice with Canadian investors. Recently more and more people have realized that their cost is higher than the benefits.  If the loonie has a quick rebound, Canadian investors who use unhedged funds will see the value of their foreign holdings drop. Switching to hedged versions of those same funds will at least protect investors from that loss – sounds like an obvious move, right?

Personally I’m not doing this because I don’t know what will happen.  I bet you don’t either!  Let’s explore some questions and assumptions about the dropping loonie and what should really be done about it.

What’s Next?

First, it’s really hard to guess how much further the loonie will fall, when it will turn around, and how much it will rebound.  If we knew the future investing (and life) would be a lot easier!  All we know is that it might fall further, it might bounce back, or it might stay at this level for a few years.

Not too helpful when you need to make decisions worth thousands of dollars!  Can you imagine going into a car dealership and handing over a cheque for the full price of a vehicle to a salesperson who says “We’ll give you either a Cadillac, a Chevrolet, or nothing and we’ll let you know in 6 months which one it is”?  No one would do that, right? But a bet on exchange rates could have the exact same impact on your finances.

What’s the Upside?

With the loonie at around $0.80 US, if it got back up to $1.00 US that would be a gain of 25%.  Let’s say your investments are worth $100,000 CDN today and you have half of them outside of Canada. If you switch all those foreign investments to use currency hedging and the loonie goes back up 25%, you’ll gain $12,500 for making that move.  But if the loonie goes down another 25%, say to $0.60 US, you’ll lose $12,500 for that decision. Both outcomes are possible. It might be the right call.  It might be a bad decision.

The Bigger Question

While some investors feel like they’re losing an opportunity if they don’t take advantage of the possibility that the Canadian dollar will bounce back, I don’t see it that way.  Investors face questions like this constantly and it can be overwhelming to always wonder what the “right” move is. That’s why I like to step back and look at all of those questions from a larger perspective.

If you have 30 years until you retire and markets work like they have in the past, you should have some confidence in that.  That $12,500 we discussed above, betting on currency hedging, doesn’t look that significant over a 30-year time frame.  What I mean is, doing nothing isn’t “missing an opportunity”.  You are already going to win by just by following your plan without being distracted by news about currencies, oil prices, or interest rates.

…Remember Simple Works!

Figuring out what’s happening in the market and taking advantage of that on any given day seems like the smart thing to do.  You need to remember it’s just not that easy.  When it comes to investing, being right one time is nowhere near as important as having something that works over time – decades in fact.

Keeping things simple helps you today and in the future.  Just by rebalancing your portfolio to your desired plan, say by adding more to your Canadian side or selling some of your foreign assets, will protect you from a falling loonie or loonie reversals.  This is what the most successful investors do:  they decide what works for them to give them the best chance at long-term success and then just follow that plan. Their plan protects them from no matter what the market does in the short-term.

Personally I find that my life is busy enough without driving myself crazy trying to follow the markets.  I don’t worry about “missed opportunities” because I know my long-term plan will do a lot better than any of those short-term, one-time changes.  I hope you feel the same about your portfolio.

Thanks to Richard Garand for today’s post, an entrepreneur and advocate of index investing.  He writes about how to get the best results as an index investor on his site, Master Your Portfolio.  A snapshot of how Richard invests is on my site here.  Thanks for sharing Richard!

Mark Seed is the founder, editor and owner of My Own Advisor - one of Canada's leading personal finance and investing blogs. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site.

9 Responses to "What Can Investors Do About The Dropping Loonie?"

  1. Hey Mark,

    Good advice. Over a long period of time, hedging isn’t really a big deal at all. This was actually one of my first decisions I made before buying my first stock / fund of VUN. It was a big deal for my first choice, but realize it didn’t really make a difference. I’ve since sold that fund.

    Best regards
    DB

    Reply
  2. I agree with unhedged being a good choice over the long term, and generally not trying to guess currency timing/trades.

    Hedged funds are commonly have notable tracking error and also cost considerably more than their unhedged cousins. So there is a built in “loss” to start with.

    Reply
    1. There is the additional fee for the hedged effort and tracking error as you have mentioned so you’re already working uphill. I keep all my international products unhedged.

      Reply

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