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Currency Risk for Globally Mobile Families: Match What You Spend, Not What You Own
A family we work with had a portfolio reported in US dollars, up 9% over the year, and felt poorer. Their spending was in sterling and euros, both of which had strengthened. Measured in what they actually buy, the year was flat.
This is the most common unmanaged risk in internationally mobile wealth, and it's almost never on the investment committee agenda.
Start with what you'll spend, not what you own
Begin with a list of the money you'll need and when, then match your investments to it. Big institutions have worked this way for decades. They call those future spending needs "liabilities", but for a family it simply means the money you'll spend and when.
Write it down honestly, in three buckets:
- Near-term (0–3 years): living costs, school fees, tax payments and planned purchases. The currency is whatever the family spends in today.
- Medium-term (3–10 years): university, buying a property, investing in a business, a possible move abroad.
- Long-term (10 years+): retirement income, succession (passing wealth on) and philanthropy. Here the currency is wherever the family expects to be, weighted by how likely each outcome is.
Now compare that list to the currencies your investments are actually in. In most families the mismatch is large, unintended and undocumented. Nobody chose it. It just accumulated, like the drawer of cables nobody can identify.
Why your statement may be fooling you
Reporting everything in one currency hides the problem twice over. First, it flatters or punishes your performance depending on which base currency was picked. Second, it hides the fact that a "diversified" portfolio may be almost entirely dollar-based in economic terms.
Why? Global stock indices, a large slice of company bonds, and most commodity exposure are dollar assets, whatever currency the fund's share class says. [Share class: the version of a fund you buy, which can be priced in a different currency from what the fund holds.]
The fix is simple. Ask for reporting in two currencies: the one you mainly spend in, and the portfolio's base currency. The gap between the two lines is your currency exposure.
Five rules we use
Here's the framework we use with families. There are five parts.
1. Fully match near-term spending. Money you'll spend within three years should be held in the currency you'll spend it in, in cash or short-dated instruments (investments that mature soon). This isn't a market view. It's removing an unnecessary risk from money with no time to recover.
2. Mostly match medium-term spending. Where you know the spending currency, such as a mortgage, a fee schedule or a committed purchase, match most of it. Where it's genuinely uncertain, split it.
3. Let long-term growth assets be globally diversified and largely unhedged. "Hedging" means paying to cancel out currency swings. Over long periods, the currency exposure in a globally diversified share portfolio acts as a diversifier rather than a pure risk. The cost and complexity of permanent hedging usually outweigh the benefit. Hedging share-portfolio currency risk also creates a cash-flow obligation at exactly the wrong moments.
4. Hedge bonds back to your spending currency. Currency swings swamp the return of high-quality bonds. Unhedged foreign bonds aren't a defensive asset. They're a currency bet with a coupon (the regular interest payment).
5. Match debt to the asset and the income. A euro mortgage paid from dollar income is a currency bet made with borrowed money. It may be the right position, but it should at least be a chosen one.
What does hedging cost?
Hedging is never free. The price of a hedge reflects the gap between interest rates in the two currencies. When you hedge from a high-rate currency into a low-rate one, you give up much of that gap. Over a decade this compounds into real money.
That's why we hedge spending needs and defensive assets rather than everything. Hedging should buy certainty where you need it. It shouldn't be applied as a blanket policy.
The tools come in ascending order of complexity:
- Holding the currency itself.
- Currency-hedged share classes of funds.
- Rolling forward contracts.
- Options.
Most families need only the first two.
Moving country changes the answer
If you plan to move, your currency plan has to move with you. A family expecting to go from London to Dubai in three years has a sterling spending profile that becomes a dirham profile. The dirham is effectively linked to the dollar.
Phase that change in gradually, in advance. Don't do it all on the day of the move, when your whole position is exposed to a single exchange rate on a single date.
The same goes for selling a business. If the proceeds arrive in one currency and you live in another, the exchange decision on completion day can matter more than a year of investment performance. Plan it before completion, in writing.
Where does tax come in?
Check the tax before you hedge. Currency gains are taxable in several countries, sometimes on transactions you don't think of as trades, such as repaying a foreign-currency loan or switching share classes.
Before you set up any hedging programme, confirm how your country of residence taxes forward contracts and currency gains. A hedge that works economically but creates tax bills on paper gains every year isn't an improvement. (Those are "dry" charges: tax due on profit you haven't actually cashed in.)
What does good look like?
- A one-page map of your spending by currency and time horizon, reviewed annually.
- Portfolio reporting in both your spending currency and the base currency.
- Near-term money matched, defensive assets hedged, growth assets globally diversified.
- Debt currency deliberately chosen against the asset and the income paying for it.
- A written plan for any known future currency switch.
None of this needs a trading desk. It needs you to write down what you'll spend and in what currency.
Veelgestelde vragen
Should I just hold everything in dollars?
Only if you'll spend in dollars. A dollar portfolio funding euro costs is a bet, not a safe default.
Are currency-hedged fund share classes enough?
For most families, for bonds, yes. They're simple to run and priced transparently.
Does gold solve currency risk?
No. Gold is a separate asset with its own ups and downs, priced in dollars. It's no substitute for matching your spending.
How often should this be reviewed?
Once a year, and straight away if you move country, have a big cash event (like selling a business) or your borrowing changes materially.
