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Thursday, January 5, 2017

How to Cope with Weakening of Currency

In the previous post of "How to React in an Uncertain Economy", expose to foreign currency is one of the way. This is especially true when most of your assets are denominated in a weakening currency, for example, the Malaysian Ringgit (MYR) which breeds anxiety among Malaysian.

Taken from

Ringgit has breached the psychological mark of 4.50 against the US dollar, as foreign investors continued to pare down their holdings of Malaysian government bonds. Not just against the greenback, it slipped against the Singapore dollar to 3.1096; against the British pound sterling to 5.5163; against the Euro to 4.6837 from 4.6892; and against the Australian dollar to 3.2680.

Historically, the Ringgit reached a record low of 2.10 in October of 1978 and an all time high of 4.71 in January of 1998. So where are we now? Is Ringgit weakening to the all time high? How high can it goes? Will the government peg the ringgit to stop any further decline? These are all the uncertainties that made us fear.

Are you feeling the same too?

Parents with kids studying abroad would feel the pinch the most with the ringgit continue to slide. Some are also planning to shorten the study period of their children to cope with the extra costs incurred, while there are also those children that might need to take up part time jobs to help finance their education. Meanwhile, many are looking at other destinations for their children’s higher studies.

From consumer point of view, one may argue that the impact would be minimum so long as all spending are done in Malaysia and avoid imported product, right? No! Even domestically produced items may use parts and components or even expertise from foreign countries. Weaker currency can drive inflation up as well! Travelling overseas may required to cough out more money too!

So what can you do with your money?

To safeguard your finances, the only way is to diversify your asset into different foreign currencies. Whether you are an average investor who just wants to mitigate currency risk or a more experienced one who wants to take advantage of currency fluctuations, here's how you can do:

1. Stocking Up Foreign Currency in Foreign Currency Account (FCA)
This is the easiest and straightforward way to mitigate the currency risk. Whether it is a Foreign Currency Savings Account (normal account) or Foreign Currency Time Deposit Account (like FD), you can maintain a foreign currency in a local bank account as well. While mitigating the currency risk, you can also enjoy potentially higher interest rate. FCA is eligible for PIDM protection up to RM250,000 too!

2. Buy Overseas Properties
One way to hedge against a weaker ringgit before it falls is to buy property in countries where the currency is more stable, which would be an indirect way of hedging. However, this method is only suitable for investors who qualify as high net-worth individuals. This method would be very helpful if the property is invested in the country where the children will be going for education.

3. Invest in Foreign Stock Market
Investing in foreign stock market can be fruitful especially in stocks such as Google, Apple, Microsoft, Amazon and so on! If you have purchased any of these stocks 10 years ago, you would be seeing a double figure annualized return! (Google-15%, Apple-28%, Microsoft-10%, Amazon-37%) However, investing in these foreign stocks is only suitable for those who have the skills and time to manage and to choose the right stock.

4. Expose to Currency-Hedged or Foreign Currency Denominated Unit Trust Fund
Besides mitigating currency risk, you may want to invest into currency-hedged unit trust fund whereby the fund would remove the currency risk for you thru hedging. Subsequently, you can also opt for unit trust fund denominated in different currency such as USD, AUD and so on. However, the downside is that when you sell, it will be converting back to ringgit. So it may not be ideal for those who actually needed to use the foreign currency like travel or children study abroad.

5. Invest in Capital Protected Foreign Index Investment  
Capital Protected Foreign Index Investment can be suitable for those who doesn't have the appetite to take the risk and the time to do research like those in Method 2, 3 and 4. It gives the opportunity to hold stronger currencies while making potential gain in foreign index such as S&P 500, MSCI Emerging Market, MSCI World and so on. Most importantly, it is principal protected without having to fear of losing your capital.

Now you have known all the possible way to cope with weakening of currency. The question is...

Are you going to do it now or wait to drop further?

The best time is always now as nobody can really time the market. If you have any other methods, feel free to share in the comment section below too!

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