Millionaire Expat - Conversion Impact Question

[abigail_akaprincess]

Recently finished the Millionaire Expat book by Andrew Hallam. Fantastic read - I could not recommend it enough to expats.

However, there is one thing that is really throwing me off. He repeatedly talks about how conversion rate fluctuations don't impact investments (at least this is the impression I've gotten from reading it).

He even shares an example to highlight how it doesn't impact your investment:

You want to buy a house in Canada for 500k CAD, but the realtor sells only in USD. At this point CAD is worth 80 US cents. So you pay 400k USD.

A year later, you sell the home. The price of the home did not increase and the realtor wants to sell in USD again. This time, the USD rose significantly against CAD, and the price of your home is now $300,000 USD.

So essentially:

CAD 1 USD to CAD USD 1 CAD to USD 2022
$500,000
0.8
$400,000
1.25
2023
$500,000
0.6
$300,000
1.67

But I'm very confused because currency fluctuations would have to impact your investment.

As another example:

Scenario - You buy 100 AAPL stock with AUD (1 AUD = 0.62 USD or 1 USD = 1.60 AUD). Price of the stock doubled 10 years later. And AUD conversion over took the USD.

2022 Quantity Price AUD Initial Invest USD Initial Invest 1 USD to AUD 1 AUD to USD
AAPL
100
20
3,200
2,000
1.6
0.62
2032 Quantity Price AUD Return USD Return 1 USD to AUD 1 AUD to USD
AAPL
100
40
2,480
4,000
0.62
1.6

So in the above scenario I'm losing money on my initial investment due to conversion fluctuations. Am I correct? It does have an impact?

I'll be very embarrassed if my math is wrong. But not surprised. Go easy on me....

 

[angusargyle12]

@abigail_akaprincess I don't know his wording on this. Yes, there's an impact, but if you're buying global assets (which is what you will do if you're buying a well diversified basket of assets), then it doesn't matter if you buy in local currency or foreign currency. My suspicion is that's his main point.

For example, Apple trades on a variety of exchanges around the world. On each exchange, it's priced in the local currency. However, that price is equivalent to the USD price converted. Whether you buy in local currency or foreign currency is meaningless. Likewise, when you sell it, the return will be the USD return converted to local currency.

The above applies to ETFs as well that track indexes. Whether they're priced in USD, EUR, AUD, or CAD is irrelevant if the underlying assets are the same.

Yes, all else being equal, there is currency risk when buying diversified foreign assets. However, all else is rarely equal. When there's currency movement, there's usually price movement in the security that takes into account the new currency paradigm. Which is not to say that it's always 1 to 1, but it's also not static. Currencies and asset prices ebb and flow.

You can avoid all this by buying home country assets only, but that comes with its own set of risks.

 

[abigail_akaprincess]

@angusargyle12 I suppose my only concern is if I were to buy funds today and (for instance) the NZD is very weak at the moment to the USD (0.6 to 1), then if in 10 years time, that changes and NZD is more like 0.88 to 1 then it can seriously hurt my investment.

Bit of a hard pill to swallow but I guess there's no avoiding it and no way to know which way things will go in the future. So the best thing to do is just invest and try to dollar-cost average to minimise risks.

 

[angusargyle12]

@abigail_akaprincess I want to understand you better. Is it a worry about the underlying assets within the fund and their currency fluctuations or is it the price of the fund itself? Could you give me an idea of what you’re considering buying?

 

[dee_marie]

@abigail_akaprincess Anything about the book ‘other’ than investing in stocks that you would recommend expats to read it for?

 

[abigail_akaprincess]

@dee_marie It's more about investing in index funds vs individual stocks really. But also the downsides to being an expat in terms of investing and how to avoid the investment traps expats commonly fall into. He also shares a list of investment advisors he'd recommend (if you're not comfortable investing yourself), he recommends portfolios depending on your nationality/where you plan to retire as well as what platforms to use. Then he wraps it up with retirement advice.

All throughout he shares examples of expats he's talked to - the good stories and bad. Overall really insightful for expats. For some it may be basic but others may find it eyeopening.

 

[dee_marie]

@abigail_akaprincess Thanks for the summary. I think I’ll check out one of his other titles first.

 

[jenniferdao]

@abigail_akaprincess I haven’t read this book or heard of it, but what you say sounds true and your calculations look correct. The thing is the USD is generally a good investment currency because it usually holds its value agains other currencies or does even better. I don’t know CAD or AUD personally but for other currencies the opposite of your calculations would happen in real life. The dollar would get stronger and even increase your gains vs the other currency. But it is essentially an exchange rate bet, if your target currency is not USD. It’s easy for me because the USD always beats MXN over time. And I plan to use USD for retirement and not MXN.

 

[abigail_akaprincess]

@jenniferdao Yeah my real concern is that the dollar I invest in, if it's not strong at the moment, is it better to wait until it bounces back? Just because if later it does bounce back then my investment can seriously hurt.

 

[jenniferdao]

@abigail_akaprincess You seem to be thinking about investments in dollars where the underlying asset value is not in any way tied to the dollar? I can’t think of many examples of that but yeah if that is what you are thinking then it’s probably not a good idea. I’m guessing that is not what the book is talking about and it isn’t what I meant when I said that investing in USD is usually considered a good investment currency.

 

[pressingon2]

@abigail_akaprincess

He even shares an example to highlight how it doesn't impact your investment:

That's a load of crap. EVEN if you end up staying in whatever new country and the relative currency value within that country doesn't change, the total value will almost certainly impact your ability to obtain goods/services, since so many things are imported. In Canada for example if the CAD changes compared to the USD, so many things are imported from the US that your CAD will go much further or shorter. Recently the CAD has been weak against the USD and consumer goods and especially food have shot up in price dramatically (in the US prices have increased as well for various reasons but not nearly as much).

Especially for CAD or AUD which are not exactly power currencies (with USD or EUR it might be less of an issue).

I think its going to depend A LOT on where you currenty are, your home country, and where you plan on staying long term. IMO if you are a US citizen and not 100% sure where you will end up, you might as well make US based investments in USD because of all the tax requirement BS you avoid by doing so + the USD is a relatively strong/safe currency.

There are literally ppl who try to do FOREX trading to turn a profit (most lose money).

 

[raycrossley52]

@abigail_akaprincess Even in the scenario you’re showing your buying power from your assets held in usd is increasing at the same rate that your Canadian home is decreasing.

So your portfolio buys more Canadian items per dollar than previously, just as your Canadian home is worth less in usd.