nisiprius wrote: ↑
Thu Aug 16, 2018 12:45 pm
Currency risk is related to fluctuations in exchange rates. It only
exists across borders, i.e. when investing internationally. There is no currency risk involved if you use dollars to invest in dollar-denominated assets.
I think your series of statements generally has a significant element of truth. You can definitely show that empirically speaking there has been more volatility in the USD value of foreign domiciled* company stocks than the USD value or US domiciled* company stocks, each taken as a standalone. It's not necessarily true when taken as a portfolio of X% foreign and 100-X US, that depends more on which example in which period, the reasoning behind Vanguard's position of selecting a particular non-market-weight % for non-US stocks in their all in funds like Lifestrategy, etc. One can quibble with the exact analysis, the % chosen and doctrine of changing the % periodically, and the actual results in recent years. But the basic principal is that whole portfolio's have not actually necessarily had minimum volatility (or volatility relative to return) for USD based investors if entirely composed of stocks of US domiciled countries and there is no way of knowing which portfolio will have more volatility, or what it's return will be, in the future. In a realistic comparison of moderate v zero % X foreign and 100-X US that is. For X=100% foreign it's probably a safe empirical bet it will more USD volatile than X=0 but that's not at issue for most people.
Your statement I quoted is too absolute, as it relates to stocks, I believe. What you said would be true of a financial asset which promised to pay a fixed amount of USD v one which promises to pay a fixed number of foreign currency units. Which is common in the real world: regular fixed rate bonds denominated in USD or a given foreign currency. But it's not necessarily true of stocks, which are not promises to pay fixed amounts of currency. There is definitely foreign currency risk in the value of big cap US stocks: their USD earnings may visibly react to changes in the rates at which the local currency profits of extensive foreign operations are converted to USD, besides the prospects for export business from the US. Likewise there is a visible tendency for non-US developed market stocks of export dependent companies to fall/rise in local currency value as their currencies rise/fall v the USD. That's particularly true of Japanese ones, but visible elsewhere. Although again portfolio effects for moderate X is what really matters, not an absolute ranking of risk by asset as standalone.
The practical question can't be usefully simplified down to the level you've attempted to, IMO.
*there is not even a clear meaning to the term 'denominated' when it comes to stocks. American Depository Receipts of foreign companies which are traded in the US are quoted in USD but have exactly the same risk characteristics as the shares of the same companies quoted in foreign currencies on the home exchange.