So I was talking to my friend the other day. She’s a graphic designer.
“Yeah, great. Money’s rolling in at the moment.”
“You taking on more work.”
“Less actually. Mr Market’s given me a pay rise. He’s very generous.”
See, she’s a freelancer and half of her clients are based in the US. A good chunk of her pay comes in US dollars.
And so with the recent falls in the Aussie dollar, she’s effectively gotten a pay rise.
The Aussie dollar’s fallen about 25% from it’s peak. That means that the US dollars she’s earning are now worth 25% more once you bring them back home.
That’s a substantial step up. Not bad for doing nothing.
And look, I’m in the same boat. My investments in the US are generating US dollar returns. So I’ve just seen a 25% pick up in my net profit.
That will do nicely, thank you very much.
They’re cashflow plays and they’re all working a bit harder – popping a bit more in the account at the end of the month.
And a few of us got in when the getting was good. Remember when the Aussie dollar was above parity. Remember when it was $1.10?
None of us thought it would last. And we looked at it and thought it was the buying opportunity of a life time. The Aussie dollar was incredibly strong, the US market was at the very bottom of the cycle. As an Aussie investor you couldn’t ask for more.
And so I’m looking at 8% capital growth p.a, just on exchange rate movements alone! That’s before we account for any growth we’ve actually seen on the ground.
But I won’t be booking any of those profits.
Hey? Hang on Jon. What’s wrong with you? You dodging the tax man or something?
Nothing like that. I’m just not that kind of investor. I’m not a short-term hold, early exit kinda guy.
I buy for the long run. I buy well. I buy properties that are performing, and then just sit back and let them perform.
So why would I sell out my US position?
Because I’m talking double-digit rental returns here. A few of them are cashflow superstars.
And a lot of people will tell you that exchange rate risk is one of the big dangers when you’re investing overseas. But when you’re holding for the long run, exchange rate movements don’t faze you too much.
And so the Aussie goes up, it goes down. It’s always doing something. But you only care about two exchange rates: The rate at the time of purchase; and the rate at the time of sale.
But if you’re not selling, or can be flexible with when you choose to sell, then the downside risks are pretty limited.
But look, it is worth being mindful of the exchange rate. And people are asking me if they’ve missed the boat. They’re kicking themselves that they didn’t get in when the Aussie was up around $1.10.
Sure, buying at $1.10 would have been a smart move if you knew that today the Aussie dollar today would be 73 cents… But buying today at 73 cents, and the dollar hits 60 cents is also a smart move.
And look, who knows where the exchange rate’s going. If you could predict that with any accuracy you’d be very rich.
But take a look at the long-run chart of the AUD/USD:
So you can see it’s come off a long way from it’s recent peak, but where is it now?
Still hovering above its long run average. And since the float, I kind of think about 70c being the centre of gravity.
We get a lot of swings around that point, but that’s where it seems to balance out.
And the Aussie dollar (like most currencies) tends to get a run on when it’s moving, and so it has a tendency to overshoot.
And so looking at it from where we are now, you’d have to think that momentum alone is going to take the Aussie dollar down even further.
A lot of people think it won’t be long before we see a number with a 6 in front of it.
And there are very few voices talking about a push higher from here.
Because remember what took the Aussie dollar soaring over parity. On our side it was the once in a century mining boom. On their side it was massive money printing.
Both of those factors are still in the process of reversing. Both have turned into weights around the Aussie and there’s nothing taking their place to pull the Aussie higher.
So you’d have to think that this is still a very favourable time to be looking at US assets.
You buy now at 75c, and the Aussie heads towards 60c, and you make like 10% just on exchange rate movements. So yes, buying today is a smart move if the Aussie dollar goes to 60 cents. But again, all things relative. If you’re a long term investor it’s the time that you decide to sell that matters most. Not in 6 months or a year’s time.
But you’re not going to want to sell. Because your property (which is cashflow positive because you’re awesome and you did your homework before you went blundering into the US market with your pants down) is now sending home 10% more each month.
Mr Market just gave you a pay rise.
Thank you very much.
But look, all this is based on you doing your homework, and setting up structures that work, and sourcing deals that perform. That’s not as easy as people will tell you.
There are a lot of things you need to get yourself across.
But for now, exchange rate movements aren’t top of the list.
Why aren’t you investing in the US? What’s holding you back?