Should You Hold Foreign Currency?
Almost everyone you know holds their entire life in one currency. Their pay, their savings, their rent, the price of their groceries, all of it measured in the same money. Nobody planned it that way. It is just the water they swim in.
Holding some foreign currency is really one question: whether all of your eggs need to sit in that single basket.
Here is the idea, stripped down. If everything you own is measured in one currency, then you are making a bet, whether you meant to or not, that this currency holds its value. Most of the time that bet is fine. The money you grew up with is stable, familiar, accepted everywhere you go. But a bet you did not choose is still a bet.
Spreading a small part of your savings into another currency is a way of saying, quietly, that you would rather not have every part of your future depend on the same single outcome. If the currency you live in loses ground, the money you parked elsewhere tends to hold up, and the two lean against each other.
Now here is what it does not do, because this is where people talk themselves into trouble. Foreign currency is not an investment that pays you to hold it. It does not grow the way a business grows. Parked money in another currency mostly just sits there, and its value against your home currency drifts up and down for reasons no saver can predict. You are not buying growth. You are buying a little less dependence on one outcome.
What is worth watching is not the daily rate, which will only make you anxious. It is the slower question of whether the one currency you depend on is being managed well or badly over long stretches. That is the thing a small hedge is quietly answering.
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These Personal Finance guides are written by Kanin D. Alldredge for The Currency Classroom, and they are free to read. CNS Pro adds a brief before every market open, his column, and the weekly and monthly letters.
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