Should investors care about currency exchange risk when investing in US stocks?

currency exchange risk

A question from a reader

CJ raised this question regarding currency exchange risk on this blog. I think I can talk about this topic and share it with readers. Here are his words:

Hello, Mr. Andy, I have read a lot of knowledge about ETFs and US stocks in your blog, and I have benefited a lot. Thank you very much for your willingness to continue to selflessly introduce US stocks and ETFs for us to know and learn from. Let us have more choices besides Taiwan’s investment environment. I just want to ask you a question.

I have seen some financial experts recommend that people should pay more attention to the risk of exchange rate when buying ETFs in the United States. They are worried that if they win the annualized return and lose the currency exchange problem, the total assets will become useless in the end? What do you think about this point of view? I’m sorry to disturb your rest during the weekend. I took the liberty to ask you a question. First of all, I wish you a happy weekend and be well.


These remarks by so-called experts are actually typical retail investors and unprofessional views that encourage short-term and swing operations, but I personally do not deny that similar remarks have their market and click-through rate, because the brainwashed concepts that most investors have been subjected to for a long time are also in this way, I remind you all again: “The common sense that everyone thinks is not necessarily correct.”

Please note that successful investment “should not be short-term”, because there is no meaning, we are investing, not fortune-telling or prediction. And I have always been against short-term, it is difficult to accumulate satisfactory assets in short-term.

The reasons

The short answer is to ignore the currency noise and here are my reasons.

Taiwan’s financial assets return poorly

Unless you only stay in Taiwan for the rest of your life, do not go abroad, do not surf the Internet, do not shop, and only invest in Taiwan stocks or local assets in Taiwan, then the exchange rate has basically nothing to do with you.

Otherwise, you must face this problem, and there is no need to worry about this problem. Even Taiwan stocks are greatly affected by the exchange rate. Foreign capital accounts for about 40% of Taiwan stocks. When they sell Taiwan stocks and repatriate the funds back to the United States, the exchange rate of the New Taiwan dollar to the U.S. dollar will naturally fall sharply. Isn’t this year, right now, a good example?

However, the return rate of Taiwan’s financial investment tools, including the stock market, is much lower than that of foreign countries.

Foreign assets have currency exchange risk

Any foreign assets must have exchange rate issues; including the US dollar insurance policies that many Taiwanese invest in now, and of course US stocks.

There is only one situation in which the exchange rate risk of the New Taiwan dollar against the U.S. dollar can be completely eliminated; that is, Taiwan’s central bank follows Hong Kong’s example and sets an official exchange rate of the New Taiwan dollar against the U.S. dollar from today, a fixed number, which is closely pegged to the rise and fall of the U.S. dollar. There will be no exchange difference between New Taiwan dollar and US dollar.

US dollar exchange rate is very stable

Compared to euro, RMB, British pound, or Japanese Yen; the exchange rate of the US dollar is very stable. Not to mention other non-mainstream currencies.

In fact, only the U.S. dollar is the most influential right now (this topic is too big, so I will talk about it when I have time). Compared with other countries, the U.S. dollar exchange rate is relatively stable, and the U.S. dollar exchange rate cannot “fluctuate greatly” because the impact is too great.

According to statistics from the Bank for International Settlements, the US dollar accounted for more than 70% of global official foreign exchange reserves in 2000 and about 60% in 2020.

In recent years, the US dollar’s share of global cross-border remittances has indeed declined due to the competition between the renminbi and the euro, but it still accounts for more than two-thirds of the repressive proportion. Moreover, the comprehensive national strength of the United States is still unique, and those who are alive now should still be like this in their lifetime.

Ordinary people can’t handle it

Currency exchange issues involve too many levels, even greater than the stock market, and a country’s currency is the main manifestation of sovereignty, and it is also one of the two main tasks of central banks (another one is interest rates); therefore, exchange rates are typical political issues , not an economic or financial issue as most people think.

Because of this, the exchange rate cannot be an issue that ordinary people can deal with. Buffett said this many years ago. In my previous post “How investors should look at economic trends and forecasts? ” I quoted him as saying, “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do.”

Long-term investors in U.S. stocks can ignore the exchange rate issue. The reason is very simple. Compared with the exchange rate fluctuations of the U.S. dollar (I know you are concerned about exchange losses), the return rate of U.S. stocks (such as ETFs in the U.S. stock market) is “very much larger”, and exchange rate fluctuations can be eliminated.

In the long run, short-term fluctuations have little effect

I personally only advocate long-term investment. As long as there is long-term investment, even if there is a short-term large exchange rate fluctuation, it can be gradually diluted; the reason mentioned above is that the U.S. dollar exchange rate cannot fluctuate greatly, because the impact on the world is too great.

Taiwan’s US dollar exchange rate is very stable

After reading this article, a friend also pointed out another experience worth sharing, which is worth adding here. Compared to our competitors in Asia (mainly South Korea and Japan), Taiwan’s exchange rate volatility against the US dollar is much lower than that of our neighbors, and has been so for a long time. The Asian financial crisis in 1997 is a very typical example. South Korea was nearly wiped out (my term is appropriate), Thailand was too badly hurt; both countries were in crisis; other Asian countries were more or less hurt, Taiwan was barely affected.

Why was Taiwan barely affected by the 1997 Asian financial crisis? This incident aroused great discussion in the international financial circle afterwards. I personally think that compared with now, Taiwan’s national power was stronger then:

  • It is the twelfth largest trading nation in the world
  • The world’s second largest foreign exchange reserve
  • The first of the four Asian Dragons
  • Almost no foreign debt, which is rare in the world
  • Adopting a super-conservative and closed financial policy, with little connection with the international financial system (in fact, it is still the case now)

The actual calculation

More than 30 years ago, the U.S. dollar to the New Taiwan dollar used to be 1:25, but now it is 1:32. Based on this, investing for 30 years respectively represents Taiwan’s investment in U.S. stocks or U.S. dollar assets. On the surface, it seems that the NT dollar has become smaller, so you will assume that you have suffered a 28% “exchange loss” ( Let’s use the word “exchange loss” here, and we will explain it precisely later). That sounds big, doesn’t it?

But thirty years ago, if you invested in the US stock market S&P 500 ETF, including dividends, you could get an annualized return of 10.65%, which can be calculated using my tool “Querier to Annualized rate of return for S&P 500 Index” .

Then you use my tool “Simple and compound interest calculator” to calculate that if you invest with an annualized return of 10.65% compound interest, you can get the principal and interest and 20.82 times the return after 30 years.

There are more important issues

It is an exchange gain, not loss

After this article was published, I received a reply from a reader. I am very grateful to him for reminding me that “the exchange rate of US dollars and Taiwan dollars has changed from 1:25 to 1:32, which is an exchange benefit for Taiwanese investors, not an exchange loss.” Please see the reader’s commets at the end of this article for the original text. This drive me to deep dive the original question further.

To invest in U.S. stocks, foreigners must use U.S. dollars. That is to say, Taiwanese investors must first exchange their NT dollars into US dollars, which may cause the exchange rate of US dollars to Taiwan dollars. Over the past 30 years, historical experience and facts have actually proved that the possibility of losing the NT dollar to the US that Taiwanese investors worry about does not exist at all. “The exchange rate of US dollars and Taiwan dollars has changed from 1:25 to 1:32, which is an exchange “benefit” for Taiwanese investors, not an exchange loss.”

Unless you immigrate to US eventually, there is no need to exchange US dollars back to New Taiwan dollars. Because Taiwanese people will eventually realize the investment income in the end, that is, in the end, you sell the U.S. stocks, remit them back to Taiwan, and then exchange them for Taiwan dollars. In fact, your profit is much greater than you think, because assuming you invest in US stocks for 30 years. You have two incomes below:

  • Part one: thirty years of US stock capital gains, principal and interest and 20.82 times the return.
  • Part two: in addition, after the depreciation of the NT dollar against the US dollar in 30 years, you will get part one above multiplied by 28% of the exchange profit; because 1 US dollar can only be exchanged for 25 NT dollars 30 years ago, now 1 US dollar can be exchanged for 32 NT dollars.

If you immigrate at the end and you don’t need to exchange US dollars back to NT dollars, then you can only get the part one listed above, and you will not have the part two. That’s a lot of money.

Where does exchange loss come from?

But let me explain that most Taiwanese investors who invest in US stocks do not think too thoroughly, so that they are easily influenced by so-called experts or celebrities, because experts or celebrities need to attract audiences to maintain their popularity, so the point being made has to be provocative, and if the point is plausible, all the better. Remind investors that there is no impeccable investment point of view in this world, and investment points of view are very subjective; therefore, everyone can put forward a reason for investment. This is why many experts, KOL, or celebrities can survive.

Many experts, KOL, or celebrities have very short-term investment views on this issue, because short-term investment views can cater to the needs of most people who need to find comfort when they are afraid of stock prices falling, especially during bear market. Since the beginning of this year, because of the “large fluctuations” in the stock market and foreign exchange market in a short period of time because of Taiwan’s investment, few people will not panic.

If an investor converts NT dollars into U.S. dollars at this time, in case the exchange rate reverses in the next month or next week (it happened in recent weeks), most people will think that he is out of luck. The large fluctuations caused him to lose money in the short term. This is human nature.

I think the so-called experts, internet celebrities or celebrities reminding Taiwan’s US stock investors to pay attention to the possible losses in the exchange rate should refer to this situation (to meet the need of public’s short-term loss psychology); more precisely, they take short-term investment profit and loss is still considered, and band operation or timing the market is encouraged.

Devaluation of the currency itself

Another point I want to refute the opinions of so-called experts, KOL or celebrities is that according to their logic, in addition to exchange rate issues, currency must also include factors of currency devaluation (I wrote an article related to this on my blog “Tax, inflation and rate are the top three serious killers to investors“)

Moreover, the exchange rate will appreciate or fall (regardless of long-term and short-term factors), but the purchasing power of the currency caused by inflation will decrease (please refer to”Querier of US Inflation Rate” I post previously, this tool is used to check the inflation rate of the country over the years), will depreciate all currencies in the world, and no currency is immune to this problem, so this problem is more lethal to investors. Investors should pay more attention to this problem, and the priority should be higher than the exchange rate. Isn’t it?

Currency is a complex issue

My starting point at the beginning of this article is to hope and remind Taiwanese investors to simplify things and directly regard the exchange rate factor as noise when investing in US stocks, and ignore this factor at all. Therefore, the initial idea of my entire article was designed in this way. Before I added the big section “There are more important issues”, the discussion was not complete and accurate, because in fact, currency itself is a very large topic and very complex issues. This is why the role of central banks in various countries is so important.

Thanks again friends for giving me the opportunity to state my full thoughts. I took the opportunity to revise this article by including the section “There are more important issues” to fill in the relevant issues. After all, we still have to face the truth. Facts stand the test of time, not subjective opinions.

Closing words

Even if the number 28% is “exchange loss” (you can take it as the risk of investment), compared with the return of 20.82 times, the difference between the two returns is 74.36 times! Which one is persuasive? Therefore, discussing exchange rates is a waste of time and meaningless, unless investors focus on short-term foreign exchange speculation.

Buffett also said similar things: Investors should spend their time on the long-term outlook, fundamentals, and competitiveness of the individual companies you invest in, ignore the noise. I quote a sentence from Buffett’s letter to Berkshire’s shareholders in 1994 to share with you, “We will continue to ignore economic and political forecasts, which are an expensive distraction for many investors and businessmen.”

currency exchange risk

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