Why Investors Want to Add Foreign Currency to Their Portfolio

There is no shortage of investment opportunities today, but there are just as many ways to lose money. The point is to grow your portfolio, which requires a careful selection of investment vehicles.

Most financial advisors will tell clients diversification is essential for mitigating risk. Instead of putting all of your resources into a single investment channel, it’s typically more beneficial to invest in various ventures. This helps provide more stability in the event an investment doesn’t pan out or the economy takes a turn.

One investment option worth considering is foreign currency. Each type of currency has a unique market value that can fluctuate up or down based on a number of factors. For example, the value of a dollar used to based on gold valuations. Since 1971 the “gold standard” has been replaced by inflation and exchange rate. Despite the stability of the U.S. economy, the dollar is still not as highly valued as the Euro, but the conversion rate has gotten closer in recent years.

Investors are interested in foreign currency because it has the potential to gain value. Investing in foreign currency can be a sound way to expand your portfolio, however, ROI depends on the currency you choose.

Researching Foreign Currencies Before Investing

Even if an investor works with a financial advisor, it’s always best to personally research investment opportunities. It’s the first step for any investor who is considering the purchase of foreign currency.

Take Advantage of Online Currency Brokers

The easiest way for novice investors to research currencies is to use a currency buying resource like Treasury Vault. Their experts follow the valuation of various currencies and track changes over time. This will give you insight into current valuations as well as if the value of a currency is likely to rise or drop.

The Dollar Index

Another way to measure the value of the currency is to use the dollar index (DXY). The dollar index will give you a measure of how the dollar’s value compares to other currencies within overseas markets. It’s a great baseline for comparison since most investors are familiar with the value of a U.S. dollar.

Research Regional Inflation

Once an investor has narrowed the selection, more research is needed to determine the potential long-term gains of a particular currency. A strong indicator of this is inflation. Historically, periods of inflation lead to lower currency value as prices for goods and services increase. Currently, in Indonesia, where there has been substantial economic growth, officials are taking action to keep inflation at a moderate 3.5 percent increase to maintain the value of Rupiah.

Look for Stability

Nothing decreases the value of a country’s currency more than instability. Investors want to know that the country behind the currency is solvent and remain that way. Wars, civil unrest, recessions and natural disasters are some of the major events that can cause instability which affects currency valuations.

Look for Low Margin Levels

The margin levels of foreign currency is an indicator of risk. The margin levels range from 50:1 to more than 10,000:1. Currencies with low margin levels tend to be less of a risk.

Currency doesn’t just affect the cost of international investments. It’s an investment vehicle in and of itself. The rise of online brokers has made it easier to invest in foreign currencies, but those who are new to Foreign Exchange (Forex) trading should start small. Currency investments are highly liquid, however, they can also be highly volatile.

Roberto Azarcon

Roberto has worked in the personal finance field for 20 years, particularly in the areas of financial planning.

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