Understanding and Managing Currency Risk While Living Abroad
When living overseas, one risk many U.S. expats overlook is currency risk. Currency risk is the impact that shifting exchange rates can have on your income, investments, and day-to-day expenses. If left unmanaged, these fluctuations can quietly erode your wealth over time.
Here are three essential questions to ask as you plan your financial life abroad.
- How does currency risk affect my income, savings, and cost of living?
If you earn in one currency and spend in another, changes in the exchange rate can significantly reduce your real income. Similarly, if your investments are in a different currency than your future expenses, you could see gains wiped out or losses exaggerated when converted.
Even everyday costs like groceries, housing, or healthcare can become more expensive if the local currency strengthens against the U.S. dollar. That’s why currency risk isn’t just a market concern; it’s a lifestyle concern for expats.
- How can I protect my portfolio from currency volatility?
Start with global diversification. Maintaining a well-diversified portfolio across multiple currencies and economies can help mitigate the impact of fluctuations. U.S.-based ETFs that include international holdings are often a smart choice—they provide multi-currency exposure while helping you avoid tax complications like PFICs (Passive Foreign Investment Companies). Beacon Global Advisors can help you design an investment strategy that keeps your costs low, your reporting simple, and your exposure balanced.
- Should I match my assets to where I’ll spend money in the future?
Yes. This concept is called currency matching, and it’s especially important for expats. If your future retirement, home purchase, or family needs will be in a specific currency, it makes sense to align a portion of your investments accordingly.
For example, retiring in the U.S.? Keep more U.S. dollar exposure. Planning to stay in Europe? Shift some assets to euro-denominated investments. Matching your “life assets” to your “life liabilities” helps maintain your purchasing power over time.
- Should I engage in currency hedging?
Complex hedging tools like futures and options are typically reserved for large institutional investors. For individuals, they’re often expensive and impractical. However, if you have a short-term need in a specific currency, it can make sense to convert and park funds in a local, interest-bearing account to avoid risk and maintain access.
Don’t Let Currency Risk Derail Your Long-Term Plans
Currency risk may seem like a background issue, but for expats, it can become a silent threat to confidence in their financial stability. At Beacon Global Advisors, we help Americans living abroad build strategies that align their lifestyle, assets, and goals across borders and currencies.
Let’s make sure your money works for you, no matter where you live or where the markets move.
