Have you set aside a good amount of capital that you don't need right now? Then you have all the means you need to start investing. That might include investing in foreign currencies, for example. But is it wise to invest in foreign currencies? Absolutely, as long as you aren't too hasty and you keep a number of issues in mind. We have provided a summary of the most important of these.
A strongly fluctuating market
Investing in foreign currencies (also known as foreign exchange) requires a considered approach, as you have to deal with a strongly fluctuating market. Foreign currencies constantly rise and fall in value against the euro. In most cases, this value is expressed as the amount of the foreign currency that is worth one euro. The current exchange rates can be found on most financial websites, as well as on the National Bank of Belgium website.
More fluctuations equal more risk
A basic rule for every investor is that the more prices fluctuate, the higher the investment risk. And that definitely applies to anyone looking to invest in foreign currencies. Exchange rates are extremely difficult to predict, so it's a bad idea to gamble on rises or falls in the value of any given currency. Especially when you consider that even experienced investors regularly make mistakes when it comes to assessing trends on the currency markets. You should thus never start investing in foreign currencies without any preparation. Make sure you gather the background information you need and get advice from a financial expert.
Spreading your risk works
Another important rule in the world of investment is to spread your risk. After all, if you do everything in a single currency then you run the risk of your entire portfolio taking a beating at the same time. It's possible to achieve maximum diversification when investing in foreign currencies too. You should definitely keep this in the back of your mind if you invest in currencies belonging to less stable economies.
Investing in foreign currencies can be done through a number of different formulae:
- Bonds in foreign currencies are very popular. To be specific: this involves investing in company bonds that are issued in a number of different currencies. The return depends on both the interest paid by the bond and the changes in the value of the foreign currency.
- Another option is to open a time deposit account in a foreign currency. The return on this investment depends on both the interest paid by the time deposit account and changes in the exchange rate for the foreign currency you are investing in.
- In the case of shares in foreign currencies, the return depends on both the performance of the share price and the value of the foreign currency. Those looking for more security can also opt for an investment fund in a foreign currency.
There are also a whole host of speculative foreign currency investments available. However, these come with high levels of risk, so you should always gather plenty of information about the investment product in question.
Things to avoid
If you would rather avoid unpleasant surprises, keep the following tips in mind:
- Don't aim for a quick profit. So-called 'forex trading', in which foreign currencies are bought and sold in quick succession, is highly speculative and therefore comes with high risks.
- Don't gamble. Aim for credit worthiness and limit your risk of a default. The more exotic the currency, the more cautious you should be. Consider buying bonds issued by supranational institutions, for example.
- Don't leave things to chance. You should monitor your investments closely, as exchange rates are highly unpredictable.
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