The relationship between the rising Canadian dollar and your investment portfolio

Have you ever looked at your monthly portfolio statement and wondered, “why is it that my US investments have stayed flat while the US market is up this year?” Quite simply, the reason is currency.

When the Canadian dollar increases in value compared to the US dollar, it decreases the value of your US investments. For example, if a Canadian invests $100,000 in US equities while the Canadian dollar is trading at 75 cents, the cost of this investment is $133,333 in Canadian dollars. If a month later the value of the $100,000 in US equities is still $100,000, but the Canadian dollar is now trading at 80 cents, converting the investment back to Canadian dollars would only yield $125,000.  Crazy, isn’t it? The investments have remained flat for a month but the investor has lost 6%! This is the world of currency risk.

There are times when the opposite can happen and converting currency can work in your favour. An example of this effect happened in 2015 when the S&P 500 (US Market Index) posted a 1.38% annual rate of return. Because the Canadian dollar fell that year, when converting back to Canadian dollars an investor would have made an annual return of 20.83%.

Currency risk is an important factor to consider when constructing a portfolio and it’s important for you as an investor to understand the potential positive or negative effects that converting your investments can have on your portfolio’s performance. If your portfolio is exposed to currency fluctuations, you may be stuck in a funny position when watching currency prices – excited because your trip to the States won’t be as expensive due to a strong Canadian dollar, but disappointed because your portfolio isn’t performing as well.  If your looking for alternative solutions ask your advisor for hedged products that eliminate currency risks.

Disclaimer: Colin Sabourin is a certified financial planner and investment advisor with Harbourfront Wealth Management. Information provided is for illustrative purposes only and should not be considered investment advice. Nothing herein is intended as an endorsement by any person of Harbourfront Wealth Management Inc. nor should the information be construed as a statement of a typical client’s experience with Harbourfront Wealth Management Inc.