Do you feel worse off when the dollar drops against the shekel? Though some people love to guess future currency moves, watch out for the trap of making a big bet on one currency. A dual citizen, residing in one country and keeping assets in another, should consider currency diversification.
What funds are best for me?
By using international funds, you can increase your currency diversification intelligently. Due to the difficulties, Americans living in Israel have investing through Israeli banks and buying American mutual funds, many American olim turn to ETFs (Exchange Traded Funds) to internationally diversify the holdings in their investment portfolio. You could take your dollars and, through a U.S. brokerage account, invest in a dollar-denominated ETF based on the foreign stocks.
If you buy a foreign stock ETF on a non-American exchange, it can be considered a kind of currency diversification. However, the IRS will likely consider the fund an “offshore mutual fund” and tax you much more than if you just invested through America. On the other hand, it’s easy to buy ETFs that invest in non-U.S. companies through a U.S. brokerage account. (Call 02-624-2788 if you need help with a U.S. brokerage account.)
How about ADRs?
ADR (American Depository Receipts) allow you to invest in U.S. dollars in foreign company stocks that trade on Wall Street. Even if the underlying stock is foreign, all transactions are in dollars. Picking an individual overseas company, though, can be tricky, which is why most investors should speak to their financial advisors about using ETFs.
How to deal with currency risk
Be wary about trying to invest in currencies using tools like futures and options. Betting on currencies is like gambling because one side always wins and the other loses. Compare this to investing in stocks, where one stock can go up without another stock necessarily going down.
When deciding which assets and currencies to put in your investment portfolio, keep in mind your address, tax reporting requirements, currencies, and time frame.
For more information about living and investing in multi-currencies, read Profile-Financial.com/multi-currency
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published May 19, 2022.