As clients approach or settle into retirement, they rely on their advisors to carefully construct portfolios that seek to generate income, preserve capital and support the lifestyle they’ve worked hard to achieve. But currency risk hides within portfolios, and it can quietly erode even the best-laid plans.
Global diversification has long been considered a cornerstone of strategic investing. Advisors know this well; U.S. investors have allocated nearly $1 trillion to international equities via American Depositary Receipts (ADRs) seeking to capitalize on growth beyond domestic markets. As Nobel laureate Harry Markowitz famously said, “Diversification is the only free lunch in investing.”
However, if currency exposure and the associated volatility are left unaddressed, that “free lunch” may turn into an unexpected drag on returns.
Yet many advisors underestimate just how much currency movements can affect international gains. In today’s volatile environment, where market turbulence, inflation pressures and shifting trade policies dominate the headlines, unhedged foreign exchange (FX) exposure can heighten the challenges advisors are already navigating on behalf of their clients.
Your clients’ retirement portfolios might lose value to currency risk right when they can least afford it. In fact, given the relative outperformance of the U.S. dollar to most developed country currencies over the last decade, your clients may already have given up significant returns because of the underlying currency volatility.
For years, currency exposure was overlooked because investors’ customary belief was that it would equalize over time, and there were limited tools to address it. Many assumed that, over the long run, the strength or weakness of a currency would have little impact on total return.
However, that assumption no longer appears true.
Over the last decade, investors in the unhedged version of the MSCI ACWI ex USA, a broad index of international stocks that tracks large-cap and mid-cap stocks from 23 developed markets and 24 emerging markets, saw significantly lower returns, lagging the hedged equivalent by more than 2% annually. That compounded into a roughly 45% shortfall over 10 years — a gap with serious consequences for retirees depending on steady growth. For those nearing or in retirement, that level of erosion is difficult to recover from.
Today, the risk is even more pressing. Currency markets are experiencing sharper swings, driven by tariff negotiations, economic disparities and geopolitical uncertainty. Without a strategy to manage the foreign exchange risk, investors are exposed to unpredictable movements that can undercut even strong equity performance.
Examples of Shrinking Returns
Consider the impact in simple terms, assuming all else remains the same. If a client owns shares of Toyota and the yen falls 15% against the U.S. dollar, the client takes a 15% loss in returns, regardless of how the stock performs in Japan. Or take a stock that’s up 10% in its home market. If the local currency declines 8%, the U.S.-based investor sees just a 2% net return.
For retirement-focused portfolios, that kind of drag can interfere with income strategies that are built for confidence, not surprises — and it’s here to stay. Although the U.S. dollar has experienced short-term swings, it has historically held its own against major peers, remaining both a global reserve currency and a safe-haven asset. That long-term strength makes currency hedging both a short-term tactic and a lasting risk-management strategy for advisors and their clients.
The Case for Currency Hedging
While there is no one-size-fits-all answer, many advisors already allocate between 20% and 30% of equity holdings to international stocks, depending on client risk tolerance. Conservative portfolios may lean closer to 20%, while more aggressive models often include a larger share of assets in developed and emerging markets. Regardless of the exact percentage, any global allocation introduces currency exposure, and that kind of exposure warrants proactive planning.
Currency hedging helps reduce the impact of foreign-exchange fluctuations by mitigating the changes in currency values. For example, if a U.S. investor holds $30,000 in European equities and the euro weakens against the dollar, the entire position is vulnerable because the value of the investment can potentially shrink when converted back to dollars. With a hedged strategy, that currency movement is managed, helping preserve the return the investor would have received had exchange rates remained stable.
This type of strategy is especially valuable for retirees, who are more vulnerable to volatility and have less time to wait out market swings. Currency hedging helps investors maintain that necessary global diversification in their portfolios without sacrificing predictability.
For advisors looking for practical ways to implement this strategy, several portfolio-level approaches are available. These include structured hedging overlays, as well as investment vehicles such as currency-hedged single-stock ETFs that are designed to help reduce the impact of foreign exchange volatility without adding complexity to portfolio management.
The Bottom Line
Addressing currency risk is an essential component of smart financial advising. By incorporating strategies that aim to mitigate international exchange risk, advisors can help clients stay globally diversified without compromising consistency. In doing so, they may better safeguard client returns, strengthen global allocations, and demonstrate a level of diligence that sets them apart in a competitive field.
Stuart Thomas is the founding principal of Precidian Investments, which specializes in exchange-traded fund (ETF) and mutual fund development and has developed products to help reduce exposure to currency risk.
