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Before making a major financial decision you
should consult a qualified professional.
Canada's economy makes up about 2.5% of the
world economy, but the average Canadian probably has most of their money invested
in the Canadian dollar. They earn their income in Canadian dollars,
and their home and most of their possessions are located in Canada.
This results in currency risk, as they have all their assets in one
currency. If the Canadian dollar rises, they would do well because
they can buy more imported goods
with their Canadian dollars. If it falls, they will be able to buy
less, because the cost of imported goods will rise.
In order to reduce your currency risk, you should diversify among different
economies and currencies. In the stock market, you can do this by buying companies which
are based in or operate in different countries.
One way of doing this is to buy US multinational companies. These
companies are based in the United States, but operate worldwide.
Their stock trades in US dollars, but this doesn't mean that you are 100%
exposed to the US dollar with this investment, because they are doing
business in other countries. Your currency risk is spread among all
the countries in which they are doing business. If the US dollar
falls against other currencies, then the profits from the foreign
divisions will be worth more US dollars. For example, McDonald's
Restaurants has 35% of its sales in the US, 35% of its sales in Europe,
14% in Asia/Pacific, Middle East and Africa (APMEA), 8% in Latin America,
and 8% in Canada and other countries. If you bought McDonald's
shares, you would have 35% exposure to the US dollar, 35% exposure to the
pound and the euro, 14% exposure to the APMEA currencies, 8% to Latin
American currencies, and 8% to Canadian and other currencies. If you
purchase the exchange traded fund (ETF)
S&P Depositary Receipts (ticker SPY), your currency exposure works the
same way. The majority of the companies in this ETF have
Another way of diversifying your currency risk is to buy stocks or ETFs based
in other countries, such as
Vanguard Europe (VGK), which holds over 550 stocks from 16 countries
Vanguard Pacific (VPL), which holds over 500 stocks from 5 countries
Vanguard Emerging Markets (VWO), which holds over 650 stocks from 22
Even though these ETFs are bought on a US stock
exchange, they give you exposure to the economies and currencies of the
world. For example, HSBC, a large British bank, gets 32% of its profit
from Europe, 23% from Hong Kong, 16% from the rest of Asia/Pacific, 21%
from North America, and 8% from Latin America. Many of the other
stocks in these ETFs do business worldwide.
One caveat about VWO is that the accounting standards and regulatory bodies
in these countries may not be as reliable as those of the countries in SPY, VGK,