Foreign Perspectives

If you’re considering investing outside your own country whether it be in shares or in property you need to consider the interest rate in that country relative to your own and the echange rate with your own currency.

The two tend to be linked and can rarely be considered totally in isolation. If you consider relatively stable currencies then a higher interest rate will tend to make a currency more valuable and conversely a lower interest rate will tend to make it less so. I say “tend to” because it’s far from a direct link as exchange rates are notoriously fickle: if markets take a view that a currency is overvalued then it’ll go down regardless of how high the interest rates are raised in that country.

However, unless you’re into short term trading it’s largely trends in exchange and interest rates that are important rather than the value that either may have at a given time. In fact, the neither the interest rate nor the exchange rate at a given point really matters a great deal but what you do need to do is to keep an eye on the exchange rate which is, usually, the most important variable when you’re investing outside your own country.

This also affects how you should keep score. Say you’re in the UK and you’re investing in America. In that case you need to measure the performance of your portfolio in dollars, not pounds. To rate the performance in pounds is just going to create a false performance statistic as it’ll be affected by the ups and downs of sterling vs the dollar and those can be quite substantial: in the last 20 years the pound has ranged from around $1 to the pound to over $2 to the pound. Obviously you’ll still measure your bottom line performance in sterling in this case but the performance of the portfolio itself is best charted in dollars.