Currencies are not financial instruments which typically come to mind when talking about long term investments. Vast majority of financial advisors suggests a mix of bonds and stocks to their clients, with some cash investments, like money market funds or CD’s thrown into the mix. Such is long standing, conventional wisdom regarding regarding allocating money for a long haul and is almost universally practised on “main street”. The only difference is specific split among these asset groups, in most cases related to the age of person. Virtually all other forms of investments are considered “derivatives” and not suitable for most people.
These views have been slowly changing over last few years, if not decades. Explosion of hedge funds have brought alternative forms of investments, other than stocks and bonds, into a vernacular of most individual investors. Today just about everybody with any interest in financial markets knows, at least in principle, what options, futures and commodities are. More and more often these groups of securities are mentioned as separate asset classes with a place of its own in a carefully balanced investment portfolio. Same goes for currencies.
Popularity of spot Forex trading proves that currencies are great trading instruments. Brokers report record numbers of accounts opening every year, trading volumes keep rising and the most liquid markets in the world are becoming even deeper. This is easily noticed when spreads from just few years ago are compared to ones today. In many cases they were cut by half, clearly outcome of increased activity as well as competition for clients among Forex brokers.
One of the characteristics of currencies often talked about is the presence of unusually long and persistent trends. They often last months and years and are the main reason behind inclusion of them into main asset classes. But really, are currencies the kind of financial instrument that could be put away for an indeterminate period of time without more or less active portfolio management? Long term chart of any one currency pair indeed reveals long term trends, but how does it look like on bases of currency baskets, something that would have to be done in order to minimize risks of any one currency exposure? Things get a little different than.
This is a chart of how major currencies performed against a basket of peers since 1970. It was compiled and published recently by Financial Times (www.ft.com). Rates used were trade-weighted exchange: “showing the value of a country’s currency in relation to the currencies of a group of countries with which it trades. In the index, each country’s currency is given an importance in relation to the amount of trade it does”. Another way of valuing currencies is by using Purchasing Power Parity Index. Using trade-weighted exchange we can see which currencies outperformed, or underperformed, based n the same criteria. This chart is a little crowded, but individual currencies can be isolated.
The best performing currency over the period, as measured using trade-weighted exchange, has been Swiss Franc. From 1970 to about 1995 it has just about doubled in relation to all other currencies included here. Since than, however, CHF has been declining slightly. One could generously call it a sideways move. All told, over almost 40 years time span this currency gained about 80% against a basket of currencies of its major trading partners. These are not stellar results, especially considering that last 15 or so years produced a net loss….
Read conclusion of Currencies as long term investment.