Many of us, at one time or another, have probably speculated on currency. Yes, we have.
The use of the term speculation might be a bit over-the-top. But can you remember the time when we could go abroad for our holidays. When we were, one of the questions we used to ask ourselves was how much foreign currency we should take with us….
…. that was usually followed by when the best time might be to convert our Singapore dollars. As soon as we do that, then we are effectively speculating. Unwittingly, maybe. But we are speculating.
We might, for example, think that the Singapore currency might continue to strengthen. Consequently, we might also conclude that if we just wait just a bit longer, then we could get a few more “groats” for our dollar.
That is all well and good when we are talking about holidays. But it’s a different matter when we are talking about betting on currencies to make a profit. Some people might be very good at it. But most of us are lousy forex traders.
It might seem simple enough. After all, we are only talking about a pair of currencies when we trade. How difficult can it be? Well, it can be very hard. Speculation is most dangerous when it looks easiest.
There is plenty that can go wrong. It only takes some unexpectedly good or bad economic numbers, some existential event, or even the raising of an eyebrow by a central banker to send exchange rates surging or plummeting.
By extension, allowing our views about foreign exchange rates to affect our investing decisions is another mistake that many of us, private investors, can make. Sure, exchange rates are a risk when we invest. But it is also beyond our control.
Around two years ago I started a portfolio of Malaysian shares. One of the concerns at the time was the possible weakness of the Malaysian ringgit. What would happen if the Malaysian currency should fall against, say, the Singapore dollar?
What indeed? Currency risk is indeed something that every investor who invests in overseas shares should be mindful of. But if the outcome of an event is unknowable, then it is not worth worrying about.
As it has turned out, the Malaysian ringgit has been steady against the Singapore dollar. Meanwhile, the portfolio of Malaysian shares has jumped 16% in value. It would have been a mistake to let the currency tail wag the pedigree portfolio.
So, focus on the things that we can control, namely, look for good companies, rather than the things we can’t, namely, exchange rates.
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Disclosure: David Kuo does not own any of the shares mentioned.