A common financial preoccupation among expats is the exchange rate. It seems that a fair number of people have a daily ritual of checking what the rate is, so they can worry about it. Now we have smartphones, there is no limit to how many times we can look – and let currency concerns make us properly miserable.
In an effort to up our currency game, we often cling to the musings of economists and currency experts. However, the only real way to ‘win’ here is to hold your money only in the currency you spend on a regular basis. Anything else is clearly a risk. How very dull for the gamers!
When it comes to currency, any ‘wins’ tend to stem from sheer luck rather than financial clairvoyance, and this very much applies to the experts too.
I remember sitting in a meeting in central London (at a nice French restaurant, coincidentally) with an executive of one of the world’s largest investment banks, discussing their quarterly glossy newsletter, which they sent to their ultra-wealthy clients. It contained an interesting currency section that analysed and predicted the future of the British pound versus the euro. I had seen it. Indeed, I received a copy of the newsletter each quarter, kindly sent by the executive’s assistant, and eagerly turned to this currency section as soon as it arrived. Moreover, I had kept and reviewed each copy. After all, if these guys do not have the answers, who does?
That day, I said to the executive: “Do you realise that in every newsletter you’ve produced over the last four years, not one of your forecasts has been remotely right?”
His face turned a shade of red not dissimilar to the Bordeaux in his glass.
“Ah yes, you spotted that? We are trying to do better.” He muttered for a short while about a change of team and systems before switching the subject entirely, hastily returning the offending publication to his briefcase.
I have a number of similar stories I could share, including the best and brightest of Threadneedle Street getting it hopelessly wrong. In some cases this triggered their own bankruptcy, along with huge losses for their clients (who were hopefully very aware of the risks involved in international money market trading).
When I think back over the last 25 years in this job, I cannot recall a single person I have spoken to who purchased a currency they did not actually spend on a regular basis and have it work out well. In the rare instances someone does ‘win’, a few probing questions will usually reveal it was plain luck, in the same way that even a broken clock is right twice a day.
What should I do?
Stop playing, and start planning. By planning, you can stop the daily misery of moving currency, like cards in a poker game, on the whim of the latest ‘expert’ advice.
Many people are so focused on the game, they rarely pause to consider how currency actually affects their personal, often unique, situation.
If we step back from currency pundits, stop trying to see round corners, and channel our efforts into some effective financial planning instead, we can gain more clarity.
If you live in France, yet have significant money in sterling, it might be better to take the long-term view. When doing so, it makes sense to protect your capital from the downside by ensuring you have enough euros to live on.
This means really sitting down and taking the time to do some calculations and projections. What are you sure you will need over the next few years? What might you need in the event of unknown emergencies/unexpected expenditures over the next few years? What is a comfortable/ possible length of time to cover? If you are not confident doing this yourself, engage a financial professional to help you.
Several years of forward income (or sufficient to merely supplement your income) in euros may only be a small portion of your overall capital, yet such a buffer allows you to tolerate sterling weakening, without it affecting your own planning or level of anxiety.
Should sterling strengthen in the shorter term, you still have most of your money in that currency, so have not lost much by protecting your savings from the uncertain outlook.
What this enables you to do is watch currency movements as a spectator, not as someone caught up in the thick of it and anxiously glued to updates. If you know that you have, for example, five years of forward income and an emergency fund in the currency in which you live, do the inevitable short-term currency movements matter to you?
We have come across some people who feel very uneasy about such a strategy, even though they know deep down it is completely logical.
“But this is the way I have always done it,” they will cry, as confirmation bias kicks in (our brains are wired to dismiss data/counsel that conflicts with our strongly set beliefs).
Taking yourself out of play can also cause significant fear of missing out, not least because it provides few opportunities to brag about currency ‘strategy’ to friends, family and neighbours. However, this is a small price to pay because when it comes to winning at exchange rates, the best advice is simply not to play.