Why Currency Matters

As we know holding foreign assets, like foreign stock, benefits you when the US dollar back home is weak.  In a recent observation made by the guys at IndexUniverse.com, they found that there is a huge difference between the returns made by foreign investor investing in their local markets and US investors investing in the same market.

To show this difference they used the EAFE index (a proxy used to represent all of developed international markets of Europe, Australasia, and Far East ).  Over a 3 year period, a US investor who invested in EAFE made returns of 10.5% annually.  A local investor over the same time period made 2.14% annually.  That means that the US investor made 8.36% on his investment just because he invested outside the US (EAFE) while back home the purchasing power of the US dollar fell.  Pretty nice way to benefit from a lagging US economy!

MSCI EAFE Returns Comparison – U.S. Dollar Investor vs. Local Currency Investor
YTD 2007 2006 3-Yr 5-Yr 10-Yr
U.S. Dollar Returns -13.82 11.17 26.34 10.5 15.36 5.38
Local Returns -19.06 1.17 13.81 2.14 7.26 0.21
Source: Morningstar. Data as of July 31, 2008.

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