Earn in one currency, live in another: should you hedge?
Should you hedge currency risk when you earn in one currency and spend in another? Long-term stocks, bonds, and the money you will spend soon each need a different answer.
You have heard the advice a hundred times: buy one global stock fund and leave it alone. But you live in Portugal, your rent is in euros, and the fund is full of American companies priced in dollars. So a fair worry creeps in. If the dollar falls, does my retirement fall with it? Should I be doing something to protect against the exchange rate?
That protection has a name: hedging. It means paying a small cost to lock in an exchange rate, so a currency move cannot help you or hurt you. The honest answer to whether you need it: for your long-term stock fund, usually no. For the money you will spend soon, there is a simpler and better move than hedging. Here is the whole rule, and why. It follows on from part 1, the five currencies people confuse, which landed on the one that matters: the gap between what your savings are made of and the currency your life will be paid in.
The big worry: is one global fund too risky if you live in euros?
This is the most common version of the question, and for the long saving years the answer is mostly no. Yes, a global fund leans heavily on American companies. But those companies sell all over the world and earn in many currencies, so what you actually own is more spread out than the label suggests. And over ten or twenty years, how much the stock market rises and falls matters far more to your plan than which way the exchange rate drifts. A currency swing that feels huge over one year is small next to what stocks themselves do over twenty.
The currency risk does not disappear. It is just easier to live with when you have years to wait out a bad exchange-rate patch. It gets sharper the closer you are to actually spending the money, because then you cannot wait. That is where the real work is, not in the fund you will not touch for two decades.
Your long-term stock fund: leave the exchange rate alone
For a global stock fund you are holding for the long run, the common default is not to hedge it, and there are a few honest reasons. There is no single right amount to hedge; it changes with your currency and the times. Hedging is not free. And holding a spread of currencies is itself a mild kind of diversification, so hedging it all away can remove a small cushion instead of adding one. Leaving it unhedged is a sensible starting point, not a commandment.
Bonds and cash: keep them in the currency you will spend
Money you are keeping safe gets the opposite answer. Bonds and cash are the calm part of your savings, the part you do not want lurching around. But an exchange-rate move in a single year can easily be bigger than everything a bond earns that year, which wrecks the whole point of holding something steady. So for bonds and cash, keep them in the currency you will actually spend (or, for bonds, in a fund that locks the exchange rate back to it). The nearer you are to spending the money, the more this matters, because it has no time to recover.
The one move that solves most of this
Here is what the question is really reaching for. As you get close to living off your savings, keep the next few years of spending money in cash and safe short-term bonds, in the currency you will spend. How many years is a judgement call: two might be plenty for one household, another might want more. This little reserve does not protect your whole portfolio from the exchange rate. It does something more useful. It means a bad exchange-rate year cannot force you to sell your stocks or convert money at a terrible moment just to pay the rent. You spend from the reserve instead, and leave the rest alone.
And notice what this is not. It is not a bet on where the exchange rate is heading. It is just common sense: your bills will be in euros, so you keep the money for those bills in euros. You do not have to predict anything for it to work, which is exactly why it beats trying to hedge the whole portfolio.
Don’t wait for a good exchange rate
The one thing worth ruling out completely is holding off, hoping for a better rate. Short-term currency predictions dress up a guess as a forecast, and they are not reliable enough to build your life around. Chasing them turns a calm saver into an anxious one. Keep investing on your normal schedule through good months and bad, hold the reserve so you are not forced to convert at the wrong time, and treat the exchange rate as something you watch, not something you predict.
How fjordFIRE helps you see it
fjordFIRE does not run your portfolio or pick a hedge for you. What it does is make the exchange rate visible. It holds each account in its own currency, adds them into one home total at each day’s rate, and separates how much your total moved because of your actual saving and investing from how much was just the exchange rate. So when your net worth jumps or dips, you can tell which one it was. That is the picture you need to know whether your investments are really growing, and whether your near-term reserve is doing its job.
Read next: Which currency should you invest in? You’re asking about five different things. · Your savings rate is half FX. Here’s the version that isn’t.
Companion tools: Emergency Fund calculator · Currency Cost calculator.
Common questions
Should I hedge my investments to my home currency?
Usually only the safe parts. For a long-term global stock fund, the common advice is to leave the exchange rate alone: there is no single right amount to hedge, hedging costs something, and holding a spread of currencies is a mild cushion in itself. For bonds and the cash you will spend soon, the better move is to keep them in the currency you will actually spend, because there a currency swing can do real damage.
Is a global stock fund too risky if I earn and spend in euros?
For the long saving years, mostly no. A global fund is more spread across currencies than its headline US weight suggests, and over long periods how much the stock market moves matters more than which way the exchange rate drifts, though currency still changes your return in any given year. That does not make hedging the whole stock fund the right answer. Currency risk bites hardest as you get close to spending the money, and you handle that by keeping your near-term spending in the currency you will spend, not by hedging everything.
Should I hedge my bonds?
Usually yes, back to the currency you will spend. Bonds are meant to be the steady part of your savings, and an exchange-rate move in a year can be bigger than the bond earns that year, which defeats the purpose. A bond fund that locks the exchange rate to your currency, or bonds held directly in your spending currency, keeps that steadying job intact.
How many years of spending should I keep in my spending currency?
There is no single number; it is a judgement, not a fixed rule. A common approach is to keep the next few years of planned spending in cash and safe short-term bonds in the currency you will actually spend, and to build that up as you near retirement. Two years might suit one household; another might hold several more. The goal is simply to avoid being forced to convert at a bad moment, not to guess the exchange rate.