When I first started investing, I paid little attention to understanding currencies. However, as the years progressed, I realised that comprehending currencies and their impact on my portfolio has become incredibly important.

Even investors who tend to favour home bias—sticking to their country’s stock exchange instead of investing globally—should understand currencies. Why? Because businesses often serve global clients and operate around the world. For instance, a company based in Australia could have 100% of its operations, income, and assets in the United States.

Additionally, there may be customer concentration risk, where companies rely heavily on a few large contracts in other countries. All of this directly and indirectly affects the performance and earnings of companies at home.

As a global investor and citizen who frequently travels and maintains operations in multiple locations, understanding currencies has become a key part of my investment and financial strategy.

Disclaimer: This is NOT about Forex trading. I do NOT forex trade, endorse forex trading or encourage any investor to dive into forex trading based on making quick bucks. You will likely get wrecked.

💱 A few recent examples to help with understanding currencies.

A recent personal experience while traveling illustrates the concept of currency exchange. My oldest son was interested in currencies, so we sat down to work out some basic exchange rates and their impact on us as travelers.

🍺 Example 1 – Malaysia Beer and Chicken Rice

Most people who have traveled and exchanged cash at a forex booth understand that you exchange one currency for another. You’ll see the buy and sell rates, which fluctuate every day—actually, every second. However, as a tourist, you’re not timing the market like a trader; you just want a local beer pronto, so you exchange your money.

I travel to Malaysia frequently, and in 2024, we spent about four months of the year there, on and off. Our first two-month stay was in March and April, during which we exchanged Australian dollars (AUD) for Malaysian Ringgit (MYR).

At that time, the exchange rate was favorable—the Australian dollar was stronger than the Malaysian Ringgit. I got a rate of 1 AUD for 3.1 MYR, which is excellent. For every 100 AUD, I received 310 MYR.

When we returned to Malaysia in October, about six months later, the Australian dollar had weakened against the Malaysian Ringgit. This time, we exchanged 1 AUD for approximately 2.4 MYR—a significant 22% difference. For every 100 AUD, I was now getting only 240 MYR. I wasn’t too happy about that, but it is what it is.

As a tourist going about shopping, you might not even notice the fluctuation in exchange rates and might not care. However, this situation got me thinking about how frequent visits can impact spending.

🍻 A clearer example of the impact…

To illustrate, I’ll use my habits of enjoying Carlsberg beer and chicken rice. A beer costs me around MYR 10 in Bukit Bintang, while a bowl of chicken rice is around MYR 12.

In March, if I spent all my ringgit on beer, I would have received around 31 beers. If I used all my money on chicken rice, I would have gotten about 25 servings. (Obviously, not for just one dinner!)

🍺 Beers = 31

🍛 Chicken Rice = 25

Upon returning in October, due to the impact of the exchange rate, if I spent all my money on beer, I would have gotten only 24 beers. For chicken rice, I would have received 20 bowls. That’s a decrease of 7 beers and 5 bowls of chicken rice—not ideal, simply due to the weakening of the AUD or, from a Malaysian perspective, the strengthening of the Ringgit.

🍺 Beer = 24

🍛 Chicken Rice = 20

For a casual tourist, this fluctuation wouldn’t matter, but for someone like me, a frequent visitor to Kuala Lumpur, it does. To counter this fluctuation, my wife and I usually load up on Malaysian Ringgit when the exchange rate is above 3 MYR to 1 AUD, knowing we will always return. At the time of writing, the rate is around 1 AUD for 2.8 MYR, so even if you exchanged a pile of Ringgit when the rate was 2.4, you’d still be in profit at 2.8 just by holding onto the currency.

🏠 Example 2 – Indian Real Estate Purchase

My family and I spend a lot of time in India. As an OCI cardholder due to my marriage, I am fortunate to be treated as a citizen of India on all levels of financial parity, and I make the most of this opportunity. Especially in the equities markets…

Over the last six months, my wife and I have been looking at investment properties. The Indian real estate market is booming and will continue to grow with the rise of the middle class and other economic tailwinds.

We decided to deploy capital by selling a property in Australia that was appreciating at subpar rates in exchange for one that could yield better returns and compound our capital.

We brought in ₹1 crore to start, which is approximately AUD 180,000 or USD 116,000.

At the time of making our first transactions, we were receiving around 56 Indian Rupees for every 1 Australian Dollar. We ultimately decided to send AUD 200,000, which converted to approximately ₹1.12 crore or ₹11,200,000. Nice!

The rupee has been quite weak against the AUD, as the currency is devaluing in an attempt to encourage local spending. However, not even three months later, at the time of writing, the rupee has strengthened, and I am now receiving only ₹52.5 for every 1 AUD. While this may not seem like a significant drop, let’s analyze that same AUD 200,000 transaction.

Under the new exchange rate, I would have only received ₹1.05 crore or ₹10,500,000. This results in a difference of ₹7 lakh or ₹700,000, which translates to about AUD 14,000. That’s certainly not a negligible amount.

Thus, we carefully time all our exchanges in and out of India because, with larger sums, every rupee counts.

💲Example 3 – USD based Share purchase.

At the beginning of last year, I was evaluating a particular stock that showed potential. The share price was exactly $100 USD per share. I decided it was worth exchanging some AUD for USD to make this purchase directly.

At the time, the exchange rate was AUD $1 for USD 0.69. I took a starter position and purchased AUD $100,000 worth of shares (Value changed for the purpose of the example). With the exchange rate of AUD/USD at 0.69, I received USD $69,000, allowing me to buy 690 shares.

The investment has performed well, and the share price now sits at USD $116 per share. My initial capital has grown in USD terms by approximately 16%, increasing the value to USD $80,040. However, if I were to exit the investment now, the overall return would look quite different.

During this holding period, the USD has strengthened significantly against the AUD and other currencies. If I were to exchange the AUD for USD now, I would only receive around USD 0.61. Despite this, because my initial exchange rate was more favorable, if I sold those shares and converted the proceeds back to AUD, my return would be based on the current rate, resulting in an overall value of AUD $131,213.

Thus, my initial investment of $100,000 has grown by 31% due to both share price appreciation and the strengthening of the USD.

*Although timing such exchanges is incredibly challenging (if not impossible), it is an important factor to consider when purchasing shares in a currency other than your own.

😖 What the hell does it all mean???

I want to emphasise the importance of understanding currencies. Whether you are a global investor or not, currency fluctuations can significantly impact your overall portfolio.

Let me provide a recent example involving a US-based small-cap company that was selling products in the Australian market. A considerable portion of their revenue faced concentration risk not from their clients, but from the currency in which they received payments.

The company experienced a decline in profitability and revenue, not due to a slowdown in demand, but because the USD strengthened against the AUD. Clients were paying in a weaker currency, while the company incurred operational costs in USD. A 10% decline in currency conversions had a substantial effect on the bottom line.

This highlights the importance of understanding where companies derive their earnings, which currencies are involved, and how these factors can impact both the income statement and balance sheet. Analysing companies that heavily depend on foreign currencies is crucial. For example, miners selling gold or ore in a strengthening currency may see increased income and profits. Conversely, companies selling into a depreciating currency while maintaining operational costs in their home currency can struggle.

💱 Currency Risk is a form of Concentration risk…

I’ve noticed many tech companies in Asia selling services in the US. This can be manageable when the exchange rate stays within normal ranges. However, when it fluctuates significantly, it can distort financial returns, making companies appear more successful than they are. This is something investors need to be aware of.

I tend to evaluate currency movements, and if they reach extremes on either side, I avoid exchanging. My base currencies are AUD, INR, USD, and EUR. I constantly monitor ideal and average exchange rates. For instance, I believe an AUD to INR exchange rate between 53-56 is ideal for buying. If rates fall outside of this range, I will refrain from making exchanges.

What I remit remains in the respective country, as I only send enough to meet operational needs or investment needs.

💡 Solutions to currency risks…

Firstly, currency risk is an important consideration in any investment thesis. For a global company that services multiple countries and receives payments in various currencies, this risk may be manageable. However, if a company is based in Singapore or India and primarily sells its services to the United States or the United Kingdom, currency risk becomes a significant factor. It’s essential to thoroughly understand the company’s earnings and evaluate their accuracy. As companies increasingly globalise their earnings and operations, currency risk has become a growing area of focus for me.

I tend to use multi-currency accounts to minimise exchange risk. If a currency I hold is within my buy range and I anticipate making an investment soon, I will exchange it and hold it. I don’t mind accumulating a currency at ideal buying ranges until I deploy it.

This can be done through multi-currency accounts or even in brokerage exchanges like Interactive Brokers (IBKR), which I consider the best for global investing. If your home currency is, say, the British Pound or the Australian Dollar, and you make regular investments in USD-denominated stocks, understanding the ideal exchange rates and making exchanges at the right times becomes crucial.

💴💵💶💷 Buy – Hold – Deploy for global investing…

For long-term holdings, currency risk may not be as critical if you choose the right company and it compounds over time, which can reduce currency risk. However, for shorter-term holdings (1 to 3 years), the impact can be dramatic. For instance, in a six-month period last year, I had a USD-denominated portfolio that grew by 12% with no underlying fundamental changes in the businesses or share prices.

The reason for this increase was simply that the USD strengthened against the initial currency I converted from. Conversely, I have also purchased stocks in a currency where the company performed exceptionally well, demonstrating a strong compound annual growth rate (CAGR) and an increase in share price. However, if I were to sell and exchange back, I would have faced a loss of about 15% on the initial capital due to the currency weakening significantly throughout the holding period.

⚠️ I want to reinforce that you cannot time currencies and rely on the hope that they will rise or fall. It simply doesn’t work. Instead, I suggest considering currency risk as part of your global investment strategy and overall financial goals.

🔑 The Key Takeaway.

I will be writing more about the topic of global investing and understanding currencies because I believe it is essential for long-term success when deploying capital around the world.

For those focused on their home country and intending to retire there, the impact of these factors may not be as significant as it is for global citizens like myself. As you expand your investments, banking, transactions, property holdings, and management of shares and cash become more complex.

Every day, I notice that my net worth or investment portfolio fluctuates by an average of 2-3%. This can be with NO movement in the investment, just the currency.

It can be a bit frustrating—while my portfolio could be up, with investments performing well and property values rising, these gains can be offset by the original currency in which I made the purchase.

One strategy I employ is to deploy capital into a country or stock without any intention of converting it back. For example, with my investments in India, I have remitted funds to the country that will always remain there. I will sell and buy, keeping everything in Indian rupees. This approach allows me to focus on patient capital, so I don’t constantly think about converting to USD or AUD.

Currency risk can be mitigated with patient long term investing strategies.

I apply the same principle to my USD-based long-term investments. My own journey has broadened over the years, and I always monitor exchange rates and currency news to understand market flows. I don’t try to time the market, but after 15 years, I can often identify whether a rate is favourable or not.

Currencies will fluctuate; they will rise and fall. However, having observed certain currencies for over a decade, you develop a strong intuition for value, despite the scepticism from others.

While it could go either way—no one truly knows—I prefer to exchange in my buy ranges to dampen out the volatility.

It is just food for thought.