Recently and especially after the Brexit vote in June 2016, the pound and currency movements have been a central theme for British investors. A weaker pound has actually increased the value of international assets, which many larger British companies hold.
Direct overseas investments have also generally increased in value because of the pound’s move. This trend may not continue as the pound is now at relatively low levels relative to recent history and so investments that benefitted from a weak pound may do less well if the pound changes course and strengthens.
Global Investing Matters
However, regardless of currency moves, it’s important to maintain the benefit of global investing. That’s why currency hedging can be important, hedging means investing in bonds and shares in different currencies, but protecting yourself against future possible currency moves, which can be a source of risk. For example, bonds currently offer steady single digit returns in most cases, but currency moves can make overseas bonds much riskier, using currency hedging can help insulate against unwanted swings in the value of the pound or other currencies.
Currency Can Be A Source Of Unwanted Risk
Many relatively inexpensive international investments now include hedging, which may help reduce risk, especially because historically currencies have been more a source of risk than actual return to passive investors. This means currencies can cause your portfolio's value to change unexpectedly, but over time currencies haven't necessarily helped investors make money.