American Expat Financial Problem: How can Americans abroad best manage the impact of big currency swings and diversify investments globally?
While Americans have to be aware of the pitfalls of taking their money out of U.S. institutions, this does not mean that they should not be invested globally. On the contrary, Americans abroad who expect to remain outside the U.S. for an extended or indefinite period of time need to manage their long-term currency risk by matching the currency denomination of their investments with the currency in which they expect to incur the bulk of their future expenses (such as home mortgage payments, college costs and retirement expenditures). For example, an American who is a long-term resident of Europe and who expects to raise and educate children and possibly retire there should have a large share of their investments in European stocks and bonds. Matching the currency of likely future expenses to assets in this manner limits the risk that large currency swings will upend long-term planning goals. For Americans who expect to return to the U.S. after only a few years abroad, a more dollar focused investment strategy is warranted. U.S. stocks and bonds should constitute the largest part of the portfolio. Smaller allocations should be made to international securities to maintain diversification.
Recommendation: Invest in a diversified, multi-currency portfolio of global assets
We recommend that Americans abroad pay particular attention to the importance of maintaining global diversification and avoid a common bias towards U.S. investments. Many expatriate Americans are not sure where their careers and lifestyles will take them. For these investors, a very broadly diversified multi-currency portfolio therefore makes the most sense. For Americans planning long-term residence in Europe, a portfolio with a large component of European stocks and bonds makes the most sense. Buying foreign stocks and bonds does not require working with a foreign broker. A diversified portfolio of European stocks, for example, can usually be bought more cheaply through a discount U.S. broker than through a European broker.
For more detailed information on currency exposure risk, see the full Thun Research article: Managing Currency Risk: As an American Abroad, In What Currency Should I Save and Invest?
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