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US stocks

What are the risks when buying US shares? What can you do to mitigate those risks?

Currency Risk

This is another consideration when buying U.S. shares from Australia. If you own a U.S. asset, the value of that asset will go up and down as the AUD to USD exchange rate changes. If the AUD to USD exchange rate goes up, the value of your U.S. asset will go down in Australian Dollar terms. This is referred to as exchange rate or FX risk.

For example, suppose the exchange rate was 0.9000. You exchange A$100,000 at this time for US$90,000 and you spend this US$90,000 on U.S. stocks. A little while later you notice that your stock portfolio value has not changed, it’s still US$90,000 but the exchange rate is now 1.000. At this point, even though your stocks have not changed, your original A$100,000 is now worth A$90,000.

It can work the other way as well. Suppose in the example above the exchange rate fell to 0.8000 then your US$90,000 stock portfolio would be worth A$112,500.

But there’s something you can do about this.

If this concerns you, you can hedge this currency risk. A hedge simply means a transaction that does the opposite of what you have. So if you have a portfolio worth US$90,000 then you need a hedge that is worth negative US$90,000. The gains and losses on one will offset the gains and losses on the other.

It’s actually a lot simpler to do this than you think and the Capital 19 advisers will help you put this hedge in place if you wish.

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This is an excerpt from the book ‘An Australian’s Guide To Investing In U.S. Stocks‘ by Matthew Jones.

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