Why investing like a tourist might pay off

(June 2007) The Canadian dollar has been in the news a lot recently, and for good reason — it reached its highest value against the U.S. dollar in 30 years. Every day, we are inundated with media coverage on what the experts are saying. The variety and number of forecasts make the confusion worse than it needs to be. I’m not going to add to that confusion by offering my own forecast. What I will try to do is offer some perspective — and one prediction.

Looking to the past for perspective doesn’t help much because economic and financial market conditions were so different when the Canadian dollar was last in this range. Inflation was running at more than three times today’s rate; interest rates were nearly twice as high; and the unemployment rate was 8%, compared to the current rate of just above 6%. The word “globalization” had barely been heard. Even if investors had the connections and the funds to invest globally, seeking out international investment opportunities was difficult. And, in contrast to its recent performance, the Canadian dollar was on its way down. In fact, way down, to a record low not much above 62 cents US in 2002.

Of course, the dollar has come a long way since then, with the current rise coming at an interesting time — the start of summer. We know that as summer approaches, many people’s minds and interests wander into areas other than work or investing (i.e., how many days before my summer vacation starts?) Many of your clients may be conflicted on how they should react to what is happening with the dollar. Their conflict lies in the fact that, while they will be concerned with the dollar’s rise and its effects on their investment portfolios, they are probably more interested in their summer vacations (I know I am). They will be celebrating the rise of the dollar because their summer trip to the U.S. or beyond just became (relatively) cheaper.

These conflicting priorities form the basis of my one prediction. I predict that over the next few weeks, you will be asked more than once by your clients for advice about and insights into the rise of the Canadian dollar. The most concerned will be the clients who have heeded the call to invest outside Canada and are now worried about the rise of the dollar and how it will affect their returns. Handling these conversations can be tricky for a financial advisor.

In thinking about how to talk to clients (and considering their possible conflicting priorities) about the dollar, I kept returning to the tourist’s positive reaction to the stronger currency. That led to the idea that investors might be better off if they viewed the stronger Canadian currency in the same light as the tourist. Tourists are happy because they get more foreign currency (in this case, U.S. dollars) for each Canadian dollar they spend. As long as they are making investments outside of Canada, the same applies to investors: they are getting more investment purchasing power for their Canadian dollar.

None of this is to deny the fact that a rising Canadian currency adversely affects the Canadian dollar return on foreign investments. But it is important to remember that the key to investing outside of Canada is to think about the whole picture — the potential returns, the potential diversification and the client’s time horizon — not just currency risk, which is very topical these days.

We all know that the advisor’s job is to determine the client’s investment goals, preferences and risk tolerance. We also know that when issues like the rise of the Canadian dollar become so prevalent in the media, clients turn to their financial advisors for insights. By looking at the whole picture and offering long-term perspectives on these top-of-mind issues, we can satisfy their worries. Done well, your clients’ only worries about the Canadian dollar will be reduced to figuring out when to purchase foreign currency for their next vacation.

Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years’ experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today. He can be reached at peter.drake@fmr.com.

(06/06/07)