Currency risk covers two scenarios:
- When the home currency appreciates but your portfolio is fully international, then that reduces your portfolio’s value.
- Likewise, when the home currency depreciates but your portfolio is fully domestic, then that reduces your portfolio’s value.
One suggested way to minimise currency risk is to split fairly (e.g. 50/50) across domestic and international equities (e.g. investing in an Australian index fund and a US index fund). Deciding how to split the international/domestic allocation is a tradeoff between concentration risk and currency risk.
- Another option is to have AUD-hedged international equities which reduces currency and concentration risk, however note that the hedging could reduce returns or even increase volatility*.
- Consider your other assets as well. If you own investment properties in Australia, then you can afford to have a more predominantly international unhedged share portfolio.