When we first start working with a new client, we always spend time talking about currencies as they relate to investing. Here’s why:
The Canadian dollar has not been the strongest currency in recent years. There are many factors that determine the strength of a country’s currency. The value of the Canadian dollar rises or falls based on supply and demand. In other words, our dollar fluctuates depending on how many people want to buy and sell dollars in the foreign exchange market. This is why the value of the currency fluctuates because the Bank of Canada (BOC) does not attempt to set the exchange rate for the dollar.
Although the BOC does not attempt to set exchange rates, it does set important interest rates that have a significant impact on currency fluctuations. Inflation and growth in the domestic economy are also key. If investment funds are not flowing into Canada (i.e. lack of confidence in current government policies), this also has a major impact. A country’s trade balance is also a factor that affects exchange rates.
currency discussion
When we first start working with a new client, we always spend time talking about currencies as they relate to investing. This is especially true if you provide a second opinion if your personal portfolio is 100% Canadian dollar-denominated. More than 60 percent of our model portfolio is denominated in currencies other than the Canadian dollar. We start the conversation by talking about how Canada is only 2.7 per cent of the world’s market capitalization. Meanwhile, the United States accounts for 58.4 percent of her.
Main currency
We will also outline how we have helped other clients with their currencies. The most common foreign currencies that we help our customers transact with are the US dollar, euro, British pound, Mexican peso, Japanese yen, and South African rand. With the exception of US dollars, almost all the currency exchanges we help our customers with are transferring inheritances, transferring funds from abroad to Canada, transferring money to family in a different country, travel funds, or transferring to another location. with respect to certain transactions relating to. Country for work or retirement. Over 90% of the currency conversions we perform for our clients are between United States Dollars (USD) and Canadian Dollars (CAD).
Diversification of investments
We strongly feel that Canadians who add foreign investments and foreign currencies to their investment portfolios will achieve superior investment performance over the long term compared to investors who limit their investments to the Canadian stock market and the Canadian dollar. Masu. Over the past few decades, we have also seen how geographic diversification can smooth out portfolio fluctuations. It’s easy to look back at historical numbers that highlight how the U.S. stock market has consistently outperformed the Canadian stock market over time. If you’ve ever walked into a financial institution and looked at the walls, you’ve probably seen Andex charts. This graph shows various financial data over different time periods. This chart highlights the importance of a long-term investment approach and diversification outside of Canada.
currency trading
When we first start talking to clients, we discuss the risks and benefits of different approaches to investing. At the bottom of the risk chart is storing your money in a Canadian Dollar (CAD) Investment Savings Account (ISA) or Guaranteed Investment Certificate (GIC). Storing your funds in CAD reduces currency risk. However, there are limits to rewards. You can purchase her ISA or GIC denominated in US dollars (USD). Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar will affect net revenue calculated in Canadian dollars. It is possible for investors to speculate regarding currencies. Speculation means intentionally betting that one currency will perform better or worse than another, often in short-term trading. Our approach to currency exposure is not speculative. Our currency exposure is intended to add exposure to stocks outside of Canada and add diversification to smooth out fluctuations over time.
total return
The total return on Canadian securities in our model portfolio is the sum of the change in stock price (from the date of initial purchase to the date of disposal) plus any dividends received over a period of time. The total return on U.S. dollar securities in the model portfolio is the same as Canadian securities plus U.S. dollar currency fluctuations. For example, if you bought a U.S. dollar security when the dollar was at 1.20 and sold a U.S. security when the dollar was at 1.30, you would have effectively made a currency gain of 8.33 percent (0.10/1.20). If you buy a US security when the US dollar is 1.30 and sell a US security when the US dollar is 1.22, your currency loss is 6.15%. [(1.22-1.30)/1.30]. The total return on a foreign security is the dividend plus the change in the security’s stock price and the change in the foreign currency relative to the Canadian dollar. Below we explain this in terms of both positive and negative currency movements.
Figure: Positive foreign currency
To illustrate the positive contribution to foreign exchange and overall returns, we use Company ABC, which does not pay dividends. For purposes of illustration, assume that his 300 shares of ABC Company were purchased at the beginning of the year when the stock price was $78.00 and the US dollar to Canadian dollar exchange rate was 1.20. Total cost in Canadian dollars was $28,080.00 (300 shares x 78.00 x 1.20). At the end of the year, ABC Company’s stock price had fallen to $72.40. However, the US dollar to Canadian dollar exchange rate was 1.36. ABC Company’s year-end value is $29,539.20 Canadian (300 shares x $72.40 x 1.36). Even though ABC’s stock price fell by $5.60, it effectively generated an unrealized gain of $1,459.20. The unrealized gain is a result of the appreciation of the USD relative to the CAD.
Diagram: Negative foreign currency
To illustrate the negative contribution to currency and overall profit margins, we will use company XYZ, which does not pay dividends. To illustrate, assume that his 400 shares of XYZ Company were purchased at the beginning of the year when the stock price was $69.70 and the exchange rate between the US dollar and the Canadian dollar was 1.30. Total cost in Canadian dollars was $36,244.00 (400 shares x 69.70 x 1.30). At the end of the year, XYZ Company’s stock price rose to $76.40. However, the US dollar to Canadian dollar exchange rate was 1.17. XYZ Company’s year-end value is $35,755.20 Canadian (400 shares x $76.40 x 1.17). Even though XYZ Company’s stock price increased by $6.70 per share, it effectively incurred an unrealized loss of $488.80. The unrealized loss was due to the depreciation of the U.S. dollar against the Canadian dollar.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management for The Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138, email kevin.greenard@scotiawealth.com or visit: greenardgroup.com.