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| Pathways Advisory Group. Inc. Michelle Carter, CFP® |
The year was 2006… Headlines screamed of a falling dollar.
Meanwhile, the international funds in your Portfolio had screaming returns.
Fast-forward to 2014… The US dollar rises against every developed market’s currency.
Meanwhile, you watched the value of the international funds in your Portfolio fall.
Why is this?
Foreign countries are trading and paying dividends in their local currency. How their currency relates to the US dollar affects the asset’s performance in your Portfolio. Occasionally, this effect can be quite dramatic, as it was in 2006 and again last year. Converting the dividends, or the proceeds from asset sales, to our currency can translate into more or less US dollars for you, based on the strength of the dollar relative to currencies abroad. When the dollar is high, you receive less dollars. And vice versa.
In 2006, as the dollar fell, the MSCI EAFE Index (a benchmark for developed international investing) had a return of 26.86%, much greater than the 19.19% return you would have made if you held the assets in their local currencies. It was also greater than most returns at home, with the S&P gaining 15.80% that same year. At that time, it was likely not uncommon for investors to wonder if they should move towards holding more international funds.
Last year we experienced another dramatic change in dollar value. The strength of the US dollar greatly attributed to a negative return in most international investments, even when those same assets had positive returns in their own country’s currency. For example, the MSCI EAFE index boasted a 5.92% return for 2014 in local currencies. Overall performance was positive in these countries for last year. However, due to the strength of the dollar, our returns for that same index here at home was in the red, at -4.9%.
This can be confusing when you hear about the “strong market performance” in 2014. You look at your Portfolio and wonder where the rest of your return went. Those 20 second market reports you hear on the radio likely refer to stock performances here at home, likely the DOW Jones or S&P 500… Large US stocks. And those assets had a great showing last year. The S&P 500 rose 13.69% in 2014.
Fortunately, the impact of the US dollar on international returns is not usually so dramatic. Markets drive returns in the long run (not currencies), and there is great value to long-term investing internationally. Although there is more volatility, the return rewards you for this (over time).
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