Global stock markets have performed incredibly well in the last twelve months. Unfortunately, for UK-based investors so has Sterling. The difference in returns between the USD versus GBP-based FTSE All World index is a staggering 10%. Naturally, this could also reverse if we ever elected Liz Truss as prime minister again, but in the meantime, what are investors to do?
We could hedge our currency exposure. Great idea, but there is a cost and it’s not like we can time the currency markets any better than the stock markets. In other words, paying north of 1% per year, every year, will take away a lot of performance in the long run. Ironically, also when Sterling goes down and we would have otherwise made money.
We could buy the FTSE. There is certainly something very appealing when buying locally and supporting our economy. Most UK companies also operate globally so it would seem we get the best of both worlds without the need to worry about exchange rates. Unfortunately, the FTSE 100 index has underperformed the S&P500 index by more than 200% in the last ten years.
We could also go half pregnant. We buy a bit of the FTSE, but invest more in global markets, as that is where the diversification and performance are coming from. Very importantly, we also hedge at least half of our currency exposure back to Sterling. Why half? Because hedging everything is too expensive and doing nothing is too risky.
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