WSJ Ask an Expert: Are Multiple Currencies Muddying Your Finances?

The Wall Street Journal invited Creveling & Creveling to be part of a panel of experts for personal finance on its WSJ Expat site. The following article originally appeared on the WSJ site and has been shared with permission:

Managing your money is hard enough when you're not constantly recalculating exchange rates. Chad and Peggy Creveling of Creveling & Creveling Private Wealth Advisory offer some strategies in this latest "Ask an Expert" edition.

Q: I'm a U.S. citizen, my wife is Australian, and our salaries are paid in Singapore dollars. We hope to split our retirement between the U.S. and another country such as New Zealand or Thailand. Given the fluctuations in exchange rates, how best can we manage our multiple currency finances and plan for our retirement?

A: As an expat grappling with multiple currency issues, you're in good company. The 2015 HSBC expat survey revealed that nearly 75% of respondents find at least one aspect of managing finances to be a challenge, with one of the top issues being dealing with currency fluctuations. Given the volatility in the currency markets in recent times this is no surprise. As shown in the table below, nearly all currencies have tumbled against the USD in the past 12 months. Diverging growth trajectories and monetary policies throughout the global economy will likely keep volatility high.

Expats by virtue of their lifestyle are typically exposed to multiple currency regimes due to mismatches in home currency, salaries, resident currency and assets held in various currency jurisdictions. Rapid movements in the currency markets can play havoc with expat net worth and cash flow, and can lead to a permanent destruction in wealth if not handled carefully. Unfortunately, it is very difficult for the typical expat to hedge currency risk with financial instruments particularly for those operating in the emerging markets. Some strategic thinking and careful management, however, can go a long way in managing currency risk for many expats.

• Identify a base currency. This should be the currency in which your assets will eventually be spent. If you plan to retire in the U.S., your base currency should be the U.S. dollar. If you're not sure where you'll end up then the USD or a mixture of key reserve currencies (USD, Euro, GBP, JPY) can be used. The key is to avoid a significant mismatch between your assets and the currency where those assets will be spent.

• Maintain an adequate emergency fund in your country of residence. Ensure you have adequate reserves for liquidity and emergencies in both the currency of your country of residence (Singapore) and of your citizenship (the U.S.). If there were an emergency, these are likely to be the currencies you would need to tap. You don't want to have your reserve funds in a depreciating currency when you need them. In some cases it may be prudent to split emergency funds between other currencies depending on your specific situation and where the funds would likely be needed.

• Beware of the currency risk embedded in overseas investment property. Many expats get caught up in the expatriate experience and want to participate in the property markets where they live and work. Realize, though, that most property purchases represent a major part of many expats' net worth, often larger than the investment portfolio. If the property is not in your base currency, realize that you are exposing yourself to a major currency mismatch that can result in a significant loss of net worth if things don't work out.

• Avoid taking currency risk in the fixed income portion of the portfolio. The fixed income portion of the portfolio is for preserving principal and managing volatility. Adding a currency mismatch can add significant risk and volatility to the overall portfolio. In general, fixed income should be in the expat's base currency. Diversification can make sense, but currency volatility can easily overshadow the benefits of diversification. This is a good place to use funds that hedge currency risk.

• Don't hedge equity. In a globally diversified portfolio there is generally no need to hedge the equity portion. Unlike fixed income, currency adds little to equity volatility. The benefits of diversification and the higher returns of equity tend to wash out the currency effect over time.

• If you must hedge, use mutual funds and ETFs that employ hedging at the fund level. It is very difficult and expensive to hedge currency risk for individuals and in the emerging markets it can be nearly impossible. Financial institutions and funds have an advantage here. If possible use mutual funds and ETFs that hedge their currency risk as a way to reduce your currency exposure. There are many funds and ETFs available now that hedge their underlying currency exposure back to one of the major reserve currencies.

• Currency is not an asset class. It doesn't need a separate position in the portfolio. Currencies move relative to each other, but do not grow over time like equities or provide a cash flow like bonds. Most speculators who try to make money on short-term currency movements end up losing money. Expats should view currency from a risk perspective rather than a speculative gain perspective. Look for currency mismatches in your assets and cash flow and seek to mitigate it where possible.

• Avoid multicurrency mortgages. Multicurrency mortgages where you can choose and switch the currency your mortgage is paid in can be a disaster. This is pure currency speculation where the risk far outweighs whatever interest rate savings you may hope to gain. The currency risk here compounds the currency risk embedded in the property. Adverse movements in both the property and the mortgage relative to your base currency can lead to large losses since you have currency exposure to a total asset value that likely exceeds the net worth of many expats.

• Beware of high-yielding deposits and dual currency products outside your base and resident currencies. Investing in high-yielding deposits denominated in other currencies is pure currency speculation. High-yielding deposit rates tend to go with high inflation and depreciating currencies. You may win a couple rounds, but a fall in the currency can easily wipe out any previous interest gains along with principal. This also goes for dual-currency deposits where you receive slightly higher interest rates by giving the bank the option to repay you in the weaker currency.

• Add currency risk to your employment negotiations. This is especially important for those working in the emerging markets. With a trend towards localization, many expats are receiving salary and benefits in the local currency rather than in their home currency. This puts the currency risk squarely on them. Major currency movement like the 1997 Asian financial crisis and recently in many of the emerging markets can result in a major loss of income that will not be covered by the employer unless negotiated ahead of time.

By virtue of their lifestyles, expats are exposed to major currency risk. Many, however, really don't think about their exposure until it is too late. It would be nice if there were simple, cost effective ways to hedge currency risk, but unfortunately there are not good solutions available for individual expats, particularly those living and working in emerging markets. While currency risk cannot be totally eliminated for many expats, careful planning can mitigate the exposure and the fallout if things get volatile.