THE BEST WAY TO INVEST IN CURRENCIES

Buy Stocks to Play the Currency Market

I was sitting in a cafe in a Singapore casino recently with a corporate manager who wanted to know why I own brokerage accounts around the world. When I told her one of my primary reasons is currency exposure, she furrowed her brow, cocked her head to the side and stopped me mid-answer.

“Wait. That doesn’t make sense. Why don’t you just go to your bank and put your money into another currency, or just go to a currency kiosk where you live … and be safe about it?”

She was equally perplexed when I told her, “In the U.S., you won’t find currency kiosks in most towns. And there aren’t many banks that will let you hold your cash in different currencies.”

If you travel outside the U.S. much, you know that America is unique in its currency myopia. Everywhere I’ve traveled – from southwestern Siberia to small villages in southern India to major and minor cities across Europe, Asia and South America – just about everyone is hyper-aware of multiple currencies, usually the local lucre, the U.S. dollar, the euro and maybe the currency of one or two countries in the nearby geographic neighborhood.

In the States … well, not so much.

Outside of major metro cities like Miami, New York and a small clot of others, I challenge you to drive or walk around town and find a “currency exchange” sign hanging on a small storefront. And the ones that do exist in the big cities are there for the benefit of tourists from other lands.

We’re simply not a country with a multi-currency outlook. That’s partly the result of our geography (only two other countries touch our borders); it’s partly the result of Americans’ insularity (just 22% of the population has a passport, and you have to wonder how many of those are hyphenated-Americans who travel overseas to visit family); and it’s partly the result of the last 65 years, during which time the dollar emerged as the de-facto global currency.

As an investor, I began seeking currency exposure back in the early-1990s. At first, I would drive to the Dallas-Fort Worth Airport, near where I lived at the time, and buy Swiss francs at the currency kiosk in Terminal A (back in the day when airports would let you into the gate area without a ticket!).

I quickly realized, though, that I wouldn’t see any real growth in my investment for quite some time, thanks to the exorbitant markups and commissions, and the fact that it takes large sums of currency to generate any meaningful profits..

And that led me to overseas brokerage accounts.

Currency Exposure through the Stock Market

To be sure, numerous ways exist to invest in currencies, from leveraged trading accounts to currency ETFs. My colleagues Sean Hyman, Evaldo Albuquerque and Chuck Butler, all over at the Currency Capitalist, are experts in trading currencies directly through those mechanisms.

But unless you’re trading currencies in leveraged fashion, in which a relatively small grubstake of, say, $10,000 controls $1 million or more of currency, then currency gains are slow to accumulate when you physically own the cash. After all, a big move in currencies might be just a handful of cents in a given year, and you’ll need to own huge sums of money for a few cents to add up to anything meaningful.

That’s why I’ve opened brokerage accounts in various corners of the world. I want the currency exposure, but I want it packaged with the growth opportunities that come from owning stocks.

Investors don’t always think about stocks in currency terms. But when you own a company like, say, E.on, a German utility giant, you are, by definition, exposing your portfolio to a foreign currency – in this case, the euro.

Any movement in the currency immediately reflects in the dollar value of your portfolio.

So, as the dollar falls in value against the euro, your portfolio grows larger in dollar terms. And that’s true even if E.on never moves in price.

Here’s how it works: When $1 buys you €0.74, E.on at €30 a share is the equivalent of $40.54.

If E.on remains locked at €30, but the dollar falls by, say, 10% and only buys €0.67, then your E.on shares in dollar terms are now worth $44.78 – the same 10% gain the euro picked up on the dollar.
That’s just half the fun, though.

Consider what happens when the dollar is falling even as the share price is rising for the stock you own. If the dollar loses that same 10% as E.on gains 10% to €33, the dollar value of your investment is suddenly $49.25 – a cumulative gain of 21.5% in your portfolio.

Profiting Even When a Stock Slumps

When you’re a dollar-based investor and you own stocks denominated in U.S. dollars, then a falling a stock price is, by definition, a loss.

Not so when you own stocks priced in other currencies. In that instance, currency gains can offset losses in the share price.
Assume E.on falls 10% to €27. If the dollar has lost 10% and buys just €0.67 per dollar, the overall impact on your portfolio is effectively a wash. E.on tumbled, but the strengthening euro insulated you from the pain.

The final sweetener: dividends. You might start out owning a company that pays a dividend of 3% of 4%, but after accounting for currency movements, your effective yield in dollar terms could be well north of 5% or more.

To be fair, currency movements can have a negative effect as well. If the dollar is rising against world currencies then the value of your portfolio suffers. But given the state of the U.S. monetary system … the unmanageable size of U.S. deficits … the problems awaiting the nation with Social Security and Medicare … and the unimaginable volume of dollars the Federal Reserve is conjuring out of thin air to throw into the economy, betting on the dollar’s long-term decline seems quite a safe bet.

After all, the dollar has been in decline now for most of the past century, ever since the creature known as the Federal Reserve emerged from the now-infamous meeting in Jekyll Island, Ga., in 1910. The sad truth is that the dollar, since the Federal Reserve opened shop, has lost 97% of its value over that last nearly 100 years.

Ultimately, as an investor you need broad currency diversification, just as you need to diversify the types of assets you own and the types of companies you hold in your portfolio. You can do that through currency ETFs, foreign-currency CDs and savings accounts, and leveraged currency-trading accounts.

Or, you can own foreign stocks and gain not just the currency exposure, but also the opportunity for growth that is inherent when you own stocks.

To me, it’s the best way to own currencies. You can double or triple your money through the years without the side-effects of slow-growth from owning currencies physically, or the risk of losing your cash quickly in a leveraged account.