Currency movements really affect your investments

In the last article your correspondent noted that the Euro, our currency in Finland, has fallen in value by some 30% against the US Dollar over the last 10 years. How does this affect an investor’s returns when a Finnish investor and an American investor buy shares through an exposure to the main equity indexes that plot their respective markets.

Ordinary investors can buy these indexes easily through ETF or exchange Traded Funds. They are cheap and easy to buy, and you can just sit on them for years without worrying about the underlying shares. Here are the results for 4 cases where Uncle Sam and Flying Finn buy the “EuroXX 50” denominated in Euros and the “S&P 500” denominated in US Dollars. The examples below are based on real numbers of 10 years ago compared to today’s values 10 years later.

If they bought the indexes 10 years ago that are denominated in their respective own currencies then Uncle Sam will have earned 104% (WOW) without any currency loss or gain on his S&P 500 investment.

However, the Flying Finn would have lost 3% on the EuroXX 50 investment.

But after the fall of the Euro, when investing in “foreign currency shares” very different results would have occurred for these two gentlemen…

Uncle Sam would have lost 33% on the EuroXX 50 while the Flying Finn would be sitting in his plane with a lovely 197% gain…

So just be careful and pray that you get it right too!

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