Pound weakness - impact on investment strategy?

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rohitiiml
Posts: 24
Joined: Wed Nov 21, 2018 5:16 pm

Pound weakness - impact on investment strategy?

Post by rohitiiml »

Hi, I am a UK resident with both me (38) and my spouse (39) earning in GBP. Intending to work till 50 before any realistic reduction in employment.

Over time I have noticed that every time there is a drawdown in global markets, GBP often weakens too. This is fine for me as my non-home assets are entirely in globally diversified index funds (100% vanguard global equity index funds). So the GBP weakness has not hurt me on the investing end.

However, with the GBP continuing to weaken and some dire levels being reached, as well as more dire predictions coming (albeit i take those with a pinch of salt), I wanted to ask how others are incorporating heightened risk of GBP depreciation into their investing plans.

Part of me says that it is a natural hedge i.e. if gbp weakens, then existing portfolio increases in value though future purchases are less attractive. Vice versa also is ok since we are in accumulation phase and hence if gbp strengthens, then future purchases become more attractive.

However, just curious what other UK investors are doing and whether there are any lessons to incorporate from previous experiences.
Valuethinker
Posts: 45572
Joined: Fri May 11, 2007 11:07 am

Re: Pound weakness - impact on investment strategy?

Post by Valuethinker »

rohitiiml wrote: Wed Sep 21, 2022 4:54 am Hi, I am a UK resident with both me (38) and my spouse (39) earning in GBP. Intending to work till 50 before any realistic reduction in employment.

Over time I have noticed that every time there is a drawdown in global markets, GBP often weakens too. This is fine for me as my non-home assets are entirely in globally diversified index funds (100% vanguard global equity index funds). So the GBP weakness has not hurt me on the investing end.

However, with the GBP continuing to weaken and some dire levels being reached, as well as more dire predictions coming (albeit i take those with a pinch of salt), I wanted to ask how others are incorporating heightened risk of GBP depreciation into their investing plans.

Part of me says that it is a natural hedge i.e. if gbp weakens, then existing portfolio increases in value though future purchases are less attractive. Vice versa also is ok since we are in accumulation phase and hence if gbp strengthens, then future purchases become more attractive.

However, just curious what other UK investors are doing and whether there are any lessons to incorporate from previous experiences.
Because most bond funds hedge back into GBP I have significant GBP exposure. It has cost me.

I don't try to forecast GBP exchange rates however it is wise to be globally diversified.

At least in theory GBP depreciation means higher inflation to come, and therefore Index Linked Gilts are more favoured.
rennale
Posts: 91
Joined: Sun Apr 23, 2017 6:50 am

Re: Pound weakness - impact on investment strategy?

Post by rennale »

As a US-based retiree with a good slab of my pension originating in the UK the USD-GBP rate impacts me every month. For years my overly cautious budget planning assumed that the worst case rate would never drop below 1.15. It sank below that a few days ago. I'm now assuming parity....

https://www.poundsterlinglive.com/gbp-l ... -rate-hike
Laurizas
Posts: 440
Joined: Mon Dec 31, 2018 4:44 am
Location: Lithuania

Re: Pound weakness - impact on investment strategy?

Post by Laurizas »

rohitiiml wrote: Wed Sep 21, 2022 4:54 am However, just curious what other UK investors are doing and whether there are any lessons to incorporate from previous experiences.
I am not an UK investor, but if I were, I would just follow J. Bogle advice: "Don't Do Something, Stand There", because if I would do something (hedge), I would be timing FX market and market timing is hard.
Valuethinker
Posts: 45572
Joined: Fri May 11, 2007 11:07 am

Re: Pound weakness - impact on investment strategy?

Post by Valuethinker »

rennale wrote: Thu Sep 22, 2022 7:01 am As a US-based retiree with a good slab of my pension originating in the UK the USD-GBP rate impacts me every month. For years my overly cautious budget planning assumed that the worst case rate would never drop below 1.15. It sank below that a few days ago. I'm now assuming parity....

https://www.poundsterlinglive.com/gbp-l ... -rate-hike
Wise.

One (small) piece of good news. The State Pension is being indexed to 10% inflation, I believe. And Defined Benefit/ Final Salary schemes in the UK are legally required to be indexed to inflation up to 5% (RPI normally, some are CPI which is lower). As I understand the position, in the USA only public sector schemes are so indexed.
superbrugha
Posts: 13
Joined: Sat Apr 30, 2022 3:52 pm

Re: Pound weakness - impact on investment strategy?

Post by superbrugha »

I am equally pessimistic about the UK's future economic prospects.

Boglehead wisdom had alerted me to the importance of a well-diversified world index fund, avoiding single country risk and so far, it has served me well.

My International bond fund is also hedged to sterling as widely advised. What this achieves, I'm not fully convinced of, I assume then that I don't benefit from sterling's recent declines, but would be protected if it recovered?

Is the currency peg rate specific to each individual unit as I buy it in the bond fund?
pennywiser
Posts: 33
Joined: Sat Jul 16, 2022 1:54 pm
Location: UK

Re: Pound weakness - impact on investment strategy?

Post by pennywiser »

I've given my thoughts on FX as a sterling investor here:
viewtopic.php?p=6859106#p6859106

I agree, it is hard to know what to do about sterling so maybe doing nothing is best way. Invest by country weight and you have one less thing to worry about.
tubaleiter
Posts: 105
Joined: Tue Mar 09, 2021 12:58 pm

Re: Pound weakness - impact on investment strategy?

Post by tubaleiter »

Agree with most others, there's not much to be done.

My equities are global, with a small UK home bias. But that UK bias primarily includes companies with most of their revenue in non-GBP, so it's roughly a wash.

My fairly small amount of bonds are UK, because that's what my pension offers at a reasonable price. They have not done well, but they're small at this point.

My cash is primarily GBP, with a small bit of USD (I moved from the US to the UK some years ago). The USD parts have done well recently, so I transferred almost everything remaining to GBP, at 1.15ish. That now looks premature, but I don't have a crystal ball.

There's really not much we can do. All the options really require you to take a position on where you think GBP is going, and FX really is a zero-sum game. Standard advice is to hedge bonds to your home currency, but that has certainly hurt lately - but may help moving forward, who knows? I don't see a reason to pay hedging fees on equities.

So just stay the course, stick to your IPS, keep investing regularly, and it will very likely take care of itself.
pennywiser
Posts: 33
Joined: Sat Jul 16, 2022 1:54 pm
Location: UK

Re: Pound weakness - impact on investment strategy?

Post by pennywiser »

Valuethinker wrote: Thu Sep 22, 2022 6:19 am
Because most bond funds hedge back into GBP I have significant GBP exposure. It has cost me.
Would you do it differently if you had were to chose AA again?

I presume you hold bonds to avoid volatility of equity markets. And you went for hedged bond funds to remove FX risk - makes perfect sense.

When market are volatile and economy is in trouble, investors historically run to USD - safe haven in storm. They sell all other currencies including GBP and EUR. So to reinforce role of bond as a stable asset class, in times of volatility it seems that we should be be in US Treasuries - unhedged. Dollar will strenghten, treasury will (normally) rise and asset values in expressed GBP will go up in value.

That's my theory anyway, not sure if it is practical though...
masni
Posts: 43
Joined: Thu Sep 04, 2014 5:56 am

Re: Pound weakness - impact on investment strategy?

Post by masni »

superbrugha wrote: Thu Sep 22, 2022 12:09 pm I am equally pessimistic about the UK's future economic prospects.

Boglehead wisdom had alerted me to the importance of a well-diversified world index fund, avoiding single country risk and so far, it has served me well.

My International bond fund is also hedged to sterling as widely advised. What this achieves, I'm not fully convinced of, I assume then that I don't benefit from sterling's recent declines, but would be protected if it recovered?

Is the currency peg rate specific to each individual unit as I buy it in the bond fund?
Which ETF are you using for your International bond fund?
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