My super and investment portfolio is heavily exposed to unhedged US assets. While their performance has been really strong for the last few years, they have taken a mighty fall since the Covid-19 pandemic hit. I'm confident that the market will recover eventually, and I am a long-term self-investor. I notice that the US/Australian exchange rate is at near record lows so I was wondering whether a professional adviser thought this would be a good time to hedge my US portfolio? Should I also be putting more into that market at these depressed levels (investments and exchange rates)?
Scott in Hawthorn, Vic
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Congratulations on the investments Scott and the growth you’ve received. Market corrections are always painful, but you’re right, markets will eventually recover. If you’re happy to remain a long term investor and you’re confident that your stocks will perform in the long run, there’s generally no need to spend money on hedging. Had one of your stocks gone gangbusters, it’s not a bad idea to make a trade or hedge to limit downs before any losses are incurred.
As hedging is designed to limit downside risk, doing it now is a little like shutting the gate after the horse has bolted.
Hedging lessens the impact of a market correction, but never completely takes away the pain. You’re able to hedge with put options, or purchase investments that are already hedged. Some ETFs or Managed Funds offer both Hedged and Unhedged versions.
Hedged investments are usually a good option if you’re looking to generate small and steady returns without additional risk due to currency fluctuations. On the downside, these fluctuations can also increase the value of the investment, but this wouldn’t be passed on by the fund manager practicing active currency management. If you believe that there is movement ahead between the US/Australian exchange rate it would be worth sitting with someone proficient in this area to discuss your options, also taking into account the existing investments in your portfolio.
Your alternate strategy idea of putting more into the market whilst at depressed levels can certainly help smooth any bumps, and lower your overall purchase price, meaning the market needs to recover less before you break even or turn a profit again.
Instead of timing the market, dollar-cost averaging is also a good way to consistently invest at regular intervals. This helps remove emotion and prevents you from trying to time the market. But then, taking advantage of market downturns is a great idea if you have the resources to do so.
If you’d still like to meet with an adviser to discuss your options, ensure that you find one who specialises in international shares and hedging as part of their role, as not all advisers practice in this area.
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