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A question many people ask, is whether they should invest overseas. We believe that, if your savings and investment horizon is greater than five years, the answer is "yes, you should have some of your investments overseas." Diversifying your investments overseas helps you minimise risk while maximising returns.
Economic risk is when overseas economies outperform the New Zealand economy, causing you to miss out on potentially higher returns overseas.
Taking economic risk a step further, most New Zealanders already have an exposure to the local economy, even before they start to think about investing their savings. Not only is their income linked to the success of the economy, they already tend to own a major asset in New Zealand: their home.
New Zealand has had a poor economic record in relation to other developed nations over the last 30 years. The future prognosis isn't good either, with the following factors comprising only a subset of those contributing to future economic risk:
In addition, you'll also be exposed to a currency risk. A weakening New Zealand currency means it takes more New Zealand dollars to pay for imports, such as vehicles and electrical goods. Imports are also used in many locally assembled goods and, of course, the price of overseas holidays goes up as the New Zealand dollar falls.
Don't let the recent rise of the New Zealand dollar mislead you. It wasn't too long ago when the dollar was taking a pounding against other currencies, particularly the American dollar.
New Zealand is now part of a global economy, in which the New Zealand dollar is bought and sold, experiencing peaks and falls over time. Even the experts don't know which way the exchange rate will move. If you have some of your savings overseas, you'll be protected.
The currency protection works quite simply.
You have $US 500 invested in overseas shares. At an exchange rate of 0.50, your investment is worth $NZ 1,000.
Now, let's assume that the exchange rate falls to 0.40. Suddenly, the cost of imports (such as petrol) goes up, but you have some protection: your $US500 investment is now worth $NZ1,250.