July was a fantastic month for my wife Bridget and myself, as we finally managed to take our “buck list” trip to Scotland that we had planned for our 20th anniversary. It was a trip with some special meaning – years ago, Bridget and I met in music school at Western University. We were in a singing class together, which terrified me as someone who had never really sung. In that course, the first song we had to sing was called “Loch Lomond”, which has this chorus:
O you take the high road, and I’ll take the low road
And I’ll be in Scotland afore ye
But me and my true love will never meet again
On the bonnie, bonnie banks of Loch Lomond
Alas, being married in 2000 meant our 20th anniversary ending up being in 2020…not a great year for travel, as you might imagine!
Last month we finally checked Loch Lomond off our bucket list. Or, might way say, having driven the road around Loch Lomdon’s north end, we nearly kicked the bucket! The A82 highway around Loch Lomond is hands down the most terrifying driving we have ever experienced. Not only were we on the “wrong” side of the road, but the road was so narrow that tour buses and lorries overhung into our lane by almost a foot.
I thought a lot about estate planning on that stretch of highway. A lot .
Fortunately, the rest of our driving experience was mostly less traumatic than that stretch of road. We had a great time, and spent a week of on the Isle of Skye, which is a truly beautiful place.
Like anyone vacationing internationally, we had to do a fair amount of currency exchange. Scotland issues its currency as pounds. When we exchanged our Canadian Dollars, I noticed something very different than Canada. In the United Kingdom, currency is issued by more than the central bank. We had pounds issued by the Bank of Scotland, the Bank of England, the Royal Bank of Scotland, the Bank of Ireland(UK), Northern Bank Limited, and National Westminster Bank. This is a very different system than Canada, where all our bank notes are issued by the Bank of Canada, or the United States, where all bank notes are issued by the Department of the Treasury.
Currency in Investing
When people invest, they often don’t realize that currency can have a significant impact on their returns. Often the media, when reporting on investment market returns, reports those returns only in that market’s specific currency. So, if you hear that the Dow Jones is up 10%, you might assume that if you held the same funds as the Dow Jones, that your portfolio would be up the exact same amount.
However, living in Canada, to determine our returns, we must convert our funds to US Dollars upon investing in those companies, and then convert them back when selling. During that time period, the ratio of the Canadian Dollar to the US Dollar may have changed. That change can have a significant impact on our personal returns here in Canada.
For example, in 2021, the Dow Jones Index had an 18.73% return in US Dollars. In Canadian Dollars, however, larger investment funds, such as pensions, will often “hedge” their currency exposure, to try and negate any swings between the foreign currency, and the “home” currency of the fund. There are a variety of methods to do this, but usually they involve purchasing contracts or options of some kind from a third party that will ensure they can trade currencies in the future at the current rate. Individual companies may also use currency hedging to cover risks. Hedging comes at a cost – but it does help prevent downside risk.
Bridget and I actually used a hedging strategy of sorts for our trip. Six weeks before our trip, we purchased about half the UK Pounds we needed. Then, a few days before, we purchased the rest. This helped us spread out the risk of a swing in the currency right as we needed to exchange funds. The two equal purchases “averaged out” each other.
Currency affects more than your investments!
One of the more day-to-day impacts of currency differences between countries is how it can impact pricing of day-to-day goods. As most of our readers might know, my hobby is photography. Back in 2015, I purchased high-quality a wildlife zoom lens that is still my go-to lens in my kit nine years later. In 2013-2014 the US Dollar was worth slightly less than the Canadian Dollar, thanks to insanely high Oil Prices that drove significant investment into Canadian Currency. At the time, Canon sold that zoom lens for $2300 Canadian. Since, presumably, Canon had hedged their currency risk, they kept it at that price for nearly two years. I had heard from friends in the industry that Canon was about to change that price since the dollar had dropped significantly. One Thursday, I bought the lens. By Monday, the price of the lens had shot up to $2700. The value of used lenses shot up a similar amount, instantly. Today, with the dollar having dropped even more, Canon sells that same lens – despite being an older model – for $3000. Ironically, my lens is now worth more than when I bought it nine years ago!
So, as you can see, currency can be a significant driver of inflation as well. As our currency goes up and down, so will the value of goods produced outside of Canada. Canadian manufacturers prefer a low Canadian dollar – so their exports are worth more in other currencies. As consumers, we want a higher dollar – which will mean our costs to purchase goods go down.
Currency is something we don’t think a lot about, but has a major impact on our investments, and our day-to-day finances. If you are interested in its history, I highly recommend “The Ascent of Money” by Niall Ferguson. Mr. Ferguson discusses nearly one thousand years of the history of currency as we know it – it’s a fascinating read. For those with an arts background, it is quite enlightening to realize that the Medici family, Europe’s best-known patrons of nearly every kind of art, made their fortune by inventing the bond market.
Don’t take the low road
As our plane landed in Glasgow, the lovely older Scottish lady sitting next to Bridget started chatting with us, and asked about the reason for our trip. When we shared our story about Loch Lomond, she started laughing, and said that we should probably know that the phrase “low road”, means “death”, and “high road” means “life”. As a planner I chuckled, realizing that even our anniversary trip tied into my line of work. Fortunately, the currency of our marriage remains at an all-time high, as did our time spent abroad.
Ryan