You'd be nuts to keep all your money in the Australian Dollar (A$) (AUDUSD), including the Australian property market and shares like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS).
What's riskier: The US dollar or the Australian Dollar?
Last night at the dinner table, I was having a discussion with the in-laws about the affordability of many household items, schooling, and lifestyles.
Yes, that's right — we were NOT talking about first home buyers!
More specifically, the conversation was about the un-affordability of many day-to-day items and services.
For example, did you know a public school camp to Canberra, to visit our war memorials, will sting a family around $600?(!) Per child, no less.
My partner is of the opinion that it is unacceptable. She said too many children will miss out because many families simply cannot afford something like that. Especially if they have more than one child.
My father-in-law blamed smashed avocados, mid-week lattes, entitlement and lavish overseas holidays.
My mother-in-law spent much of her time trying to say that the distance between him and the point couldn't be further apart. Alas, he wasn't having any of it. In many ways, I think he is right — you can't have your cake (avocado) and eat it (your first home), too.
But, ever the diplomat, I said I think each of them was right.
What does that have to do with the Australian dollar?
Last year, I told my in-laws and a group of their friends to buy US dollars.
"It doesn't really matter how you do it, just get some exposure to the US currency," I said.
Bewilderment. Bordering on displeasure.
"That's risky!" One of the baby boomers quizzically replied.
Another piped up, "how would we even do that?"
Firstly, the first point.
Economics and currency 101
You can go anyway these days and find some smooth-talkin' charlatan telling you how to trade a currency, like the AUD. Believe me, that's risky.
What I told the happy bunch of dogmatic baby boomers to do is more conservative.
As I explained to them:
The money in your bank account is cash. But before that, it's the Australian dollar. It's just another currency. Holding US dollars is arguably less risky.
Yet, when most people think of buying and holding a currency like the US dollar, they cannot stand the thought of the Aussie dollar – US dollar exchange swinging wildly from year to year. Fair enough. See the charlatan point, above.
However, fundamentally, the reason one currency strengthens against another currency over the long run boils down to the economies of the nations. Whichever country is growing fastest, with a stable financial system, generally does best over time.
The Australian dollar is down 24% versus the US dollar over the past five years. Guess what, the US economy is streets ahead of ours.
Remember the dinner debate over school fees?
I believe those affordability issues come back to two things which could have longer-term implications for our economy:
Wage growth and interest rates.
Over the past 20 years, Australian workers have enjoyed incredible increases in their wages.
But wage growth has enormous effects on our society — mostly positive — because once you get paid more it is so difficult to go back.
Ford. Holden. NEC televisions.
There's a reason we don't make these things in Australia anymore, and why robots do 75% of the work at iron ore mines in WA.
A school excursion to Canberra requires bus drivers, probably paid $30-$35 per hour plus super. Tour guides are paid who knows what per hour. Insurances. Teachers. Cooks.
You get the point.
Next, we have interest rates.
My in-laws told me how their first mortgage's 13% interest rate was the ants pants — because it was capped at 13%!
Indeed, while their friends were suffocating under a heady 17% per year, my in-laws dared not say their mortgage was capped at 13%. It would be the end of them, socially.
By design, with interest rates falling from 17% to 2.5% in a couple decades, house prices and Australia's economy has blossomed. Throw into the mix some globalisation, supply and demand, immigration… presto, that's a recipe for success.
What now?
But ask around. If you think people are struggling more than the official statistics are showing us, you should be investing at least some of your money overseas. Not for a better return, but to protect your downside.
And while you are asking around consider this: Westpac Banking Corp (ASX: WBC), Australia's second-largest bank, has 50% of its property loans as interest only. What does that tell you?
As my colleague Sean O'Neill pointed out here, that's around twice the rate of interest only loans in the US at the height of the Global Financial Crisis, which, by the way, was started by ridiculous lending practices.
The RBA thinks around one-third of the Australian workforce are part-time. That's increased dramatically in recent times.
What you can do with your Australian dollars
I'm not saying the Australian economy is going to crash and burn. Far from it.
But do you think my in-laws family friend was right? Is the Australian dollar riskier than the US dollar?
If you are like me, you will want to get some US dollar and maybe even some Euro exposure for the risk-off benefits.
Don't go to the local travel agent or currency exchange at Westfield, that'll cost you dearly. Talk to your bank, or — as I have done — open a US stockbroking account. That's two birds with one stone.
I use OptionsXpress, but Interactive Brokers is meant to be good, too — although, you should take note of the fees involved. That's not a recommendation — you should consider what's best for you.
You see, the money I deposit into my US stockbroking account is converted to US dollars at competitive rates, earns interest, and I have the option to buy shares of great companies like Apple Inc and Alphabet, the owner of Google if I so desire.
What about superannuation?
Now, you might be saying, "my superannuation invests in everything, even globally."
You are probably right. But if you are a young person (which I politely consider to be less than 40 — everyone else is 'middle aged'), accessing your superannuation is decades away.
Worse still, most 'growth' options have a chunk (maybe 40%) of exposure to Australian shares (read: bank stocks, Telstra and BHP Billiton Ltd (ASX: BHP), if you are lucky).
Most of it will be in bank stocks. In Australian dollars. Exposed to property. Just like your mortgage.
Talk about eggs in one basket.
Foolish Takeaway
Investing outside the Australian dollar might sound foreign, and it is.
But it shouldn't be considered a riskier thing purely because of the currency exchange or not worth the time because of the paperwork involved. In my opinion, having some exposure to a global currency is taking risk off the table — not adding to it.
