Why is foreign exchange necessary

When to invest in foreign exchange makes sense

The long upward trend on the stock markets since the financial crisis in 2009 has been running out of air for a while, but bonds and interest rates still offer no alternative. In this situation, many people think about a possibility that could bring a breath of fresh air to their portfolio: a foreign exchange investment. In any case, it makes sense that this asset class is subject to its own laws and does not run the same as stocks, bonds or commodities. This lack of correlation ensures balance and stability in the entire depot.

No real return without leverage products

A foreign exchange investment can also be useful for private investors, but you have to take care of trading. The aim is to benefit from currency differences or, for example, from interest rate differences through foreign currency bonds. It's exciting, but not necessarily easy. Even professionals make a mistake when they want to play the dollar against the franc or the euro against the Norwegian krone. Influencing factors such as economic growth, current accounts or central bank decisions are sometimes extremely surprising.

Anyone who wants to get involved in the foreign exchange markets is faced with a range of options, ranging from simple foreign currency accounts to derivatives and currency funds. For pure foreign exchange trading itself, you first have to set up an account with the bank or a Forex (Foreign Exchange Market) broker. Then it is necessary to analyze what is happening on the market with the help of special software. If you want to benefit from interest rate differentials in addition to currency differences, foreign currency bonds offer the opportunity to do so.

With all this, however, it makes little sense to bet on a currency pair with around 2,000 euros and then take the increase in a currency, for example by 1%. That is why leverage products are usually used that start at a factor of 100 and turn a profit of EUR 2,000 into EUR 2,000. But if it doesn't go as hoped, the whole stake is lost.

Dealing with the derivatives, futures contracts or contracts for difference (CFD) mostly used on the foreign exchange market requires a lot of experience and is often highly risky. As a consequence of the spectacular bankruptcies in the Swiss franc business at the beginning of 2015, an obligation to make additional payments for CFDs was banned in this country.

Sensible foreign exchange investment without loss of time and nerves

If all of this is too stressful for you, you can invest in currency funds. Management tries to get the best out of it with a wide variety of instruments. However, they are not cheap. A cheaper solution are foreign exchange ETFs, which map a money market index of the currencies chosen by the investor. Tactically designed ETFs, which rely on differences between the euro and the US dollar, have been able to bring returns of over 11% in the last twelve months - at annual costs of 0.39%.

There are also long-term strategic ETFs that, for example, map an index with different currencies based on purchasing power parities. The ETF uses futures contracts to buy and sell undervalued and overvalued currencies. Over the year, a good 18% plus could be achieved.

Although it is only about the exchange rate ratio of two currencies, the details of foreign exchange trading are anything but easy. A foreign exchange investment makes sense as an addition to the depot. But if you have more obligations than constantly worrying about foreign exchange trading and also want to maintain your stock portfolio, you are well served with a strategic ETF.

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