As if the debt crisis in Europe hasn't given us enough to worry about, a Washington Post article on Sunday noted that the recent strength of the U.S. dollar is harming returns for U.S. investors who hold international indexes and exchange-traded funds (ETFs).
The MSCI Europe index, for example, is down about 5% in local currencies, but that equates to a 17% loss for U.S. investors. As the Post says, that's "a harsh reminder of the powerful impact currency markets can have on international investments."
What should you do as an investor? To give us some direction and to help demystify the process,I talked to Tim Hanson, co-advisor of the Motley Fool Global Gains international investing service. Tim and his team have traveled the world in search of money-making ideas, and they're recently back from Greece, where the European debt crisis took off.
Rex: Please help explain to investors how they can be in some international index that drops 5%, but find themselves down 17%.
Tim: As a currency like the euro weakens against the dollar, any profits earned in that currency are worth less to you as an American investor who bought that investment in dollars. While these currency effects generally hedge out over time, they can create swings in times of volatility. To protect against currency effects, investors can either hedge out the currency exposure using ETFs, or convert their dollars into euros and invest via the local market.
Rex: Given the volatile currency markets and the crisis in Europe, what allocation do you recommend?
Tim: We continue to believe that all investors should have 60% international exposure. However, we don't measure a company's international presence by where it's headquartered, but rather by its sales mix. In other words, a company like Microsoft
Rex: You've mentioned Philip Morris International
Rex: Thanks, Tim. I know you're off to China again soon, and we look forward to the investing ideas you find there.
To read the Global Gains report "3 Plays to Profit From the Greek Crisis," and to follow Tim's reports from China, simply try a no-obligation free trial.
Fool analyst Rex Moore owns shares of Microsoft. Global Gains co-advisor Tim Hanson owns shares of Bladex and Philip Morris. Microsoft is a Motley Fool Inside Value selection. Banco Latinoamericano de Comercio Exterior (aka Bladex) and Philip Morris International are Motley Fool Global Gains recommendations. Diageo is a Motley Fool Income Investor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Banco Latinoamericano de Comercio Exterior. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.