Currency Risk
As anyone who has read any risk warnings which relate to financial services products and investments will no doubt recall reading (amongst other warnings) values can fall as well as rise and investors can get back less than the amount that they invested.
Whilst the investment universe is huge – comprising many thousands of funds and products – most clients are to some degree familiar with the four main investment types – equities (shares), fixed interest stocks, property and cash.
Another factor that can have a huge impact on the values of an investment are currency movements and this has been particularly relevant to UK based investors since the Brexit referendum. Since the vote to the date of writing this article, Pound Sterling has depreciated against most major currencies.
Away from the world of investments, this depreciation will have been felt by holidaymakers journeying abroad as it will have meant that the cost of buying many items abroad is now higher than before 2016 – assuming that the country they are visiting has had fairly stable retail prices in the meantime.
Many investors choose to invest in a balanced portfolio via a professional fund manager so that they don’t have too many eggs in one basket, so to speak. The fund manager is likely to invest a proportion of the money in foreign bond and equity markets – the proportion of which will to some degree depend on the investor’s appetite for investment risk. Movements in the local currencies against sterling will either then increase or decrease any investment gains or losses. So, in theory if a foreign currency climbs by 15% against the pound sterling it would be possible for a UK investor to have made 15% on that portion of the investment portfolio even if the value of the underlying shares hasn’t moved. A similar situation, though, can happen in reverse!
Whilst someone may think that investing only in UK shares might avoid the issue of currency fluctuations, the FTSE 100 index has been particularly affected since the Brexit referendum, as many of the earnings of Britain’s largest companies come from overseas.
Trying to predict currency movements accurately is nigh on impossible – for professional fund managers, let alone an amateur investor. As independent financial advisers, Chancellor Financial Management Ltd are able to assess an investors attitude to investment risk and volatility – as well as their “capacity for investment loss” and to recommend a suitable strategy for the medium to long term.
For bespoke personal finance solutions, contact us online or call 01204 526 846
