I'm interested in getting into investing, but I have a limited amount of business experience. I plan on putting a small amount of money on the market just to see how it goes.
I don't quite understand how the low CAD affects my investments in American stocks and international currency though. For a long-term investment, will the eventual rise of the CAD benefit my investments or not?
If you buy US stocks when the CAD is high and sell them when the CAD is lower you will make a currency gain on top of any profit or loss from the stock investments.
If you buy US stocks when the CAD is low and sell when the CAD is higher any profits from gains from the stock investment will be reduced and any losses will be increased.
If you are just starting out you may be better off investing in your own country to avoid any currency risk adding to your stock market risk.
At the time of writing, the Canadian dollar is worth roughly $0.75 U.S.
Now, it's not possible for you to accurately predict what it'll be worth in, say, ten years. Maybe it'll be worth $0.50 U.S. Maybe $0.67. Maybe $1.00.
Additionally, you can't know in advance if the Canadian economy will grow faster than the U.S., or slower, or by how much.
Let's say you don't want to make a prediction. You just want to invest 50% of your money in Canadian stocks, 50% in U.S. Great. Do that, and don't worry about the current interest rates.
Let's say that you do want to make a prediction. You are firmly of the belief that the Canadian dollar will be worth $1.00 U.S. dollar in approximately ten years. And furthermore, the Canadian economy and the U.S. economy will grow at roughly equal rates, in their local currencies. Great. You should put more of your money in Canadian stocks.
Let's say that you want to make a prediction. The Canadian economy is tanking. It's going to be worth $0.67 or less in ten years. And on top of that, the U.S. economy is primed for growth. It's going to grow far faster than the Canadian economy. In that case, you want to invest mostly in U.S. stocks.
Let's get more complicated. You think the Canadian dollar is going to recover, but boy, maple syrup futures are in trouble. The next decade is all about Micky Mouse. Now what should you do? Well, it depends on how fast the U.S. economy expands, compared to the currency difference.
What should you do? I can't tell you that because I can't predict the future. What did I do? I bought 25% Canadian stocks, 25% U.S. stocks, 25% world stocks, and 25% Canadian bonds (roughly), back when the Canadian dollar was stronger. What am I doing now? Same thing. I don't know enough about the respective economies to judge. If I had a firm opinion, though, I'd certainly be happy to change my percentages a little. Not a lot, but a little.
When you want to invest in an asset denominated by a foreign currency, your investment is going to have some currency risk to it. You need to worry not just about what happens to your own currency, but also the foreign currency.
Lets say you want to invest $10000 in US Stocks as a Canadian. Today that will cost you $13252, since USDCAD just hit 1.3252. You now have two ways you can make money. One is if USDCAD goes up, two is if the stocks go up. The former may not be obvious, but remember, you are holding US denominated assets currently, with the intention of one day converting those assets back into CAD. Essentially, you are long USDCAD (long USD short CAD). Since you are short CAD, if CAD goes up it hurts you
It may seem odd to think about this as a currency trade, but it opens up a possibility. If you want a foreign investment to be currency neutral, you just make the opposite currency trade, in addition to your original investment. So in this case, you would buy $10,000 in US stocks, and then short USDCAD (ie long CAD, short USD $10,000). This is kind of savvy and may not be something you would do. But its worth mentioning. And there are also some currency hedged ETFs out there that do this for you http://www.ishares.com/us/strategies/hedge-currency-impact However most are hedged relative to USD, and are meant to hedge the target countries currency, not your own.
