Track your investments in a spreadsheet or dedicated app
Imagine a squirrel hiding nuts in dozens of places for winter… But eventually forgetting where some of the delicious winter food is hidden! Diversifying like a pro by investing through a variety of platforms is a great way to spread your risk. But that’s of no use if you forget where you invested – which can easily happen if you’re a very active investor. Plus, it allows you to track the performance and find out if you need to change your strategy.
There are some great and often free tools out there to help you keep track. I myself have started using Portfolio Performance and I’m loving it, because it allows very detailed analyses. But if you just want to know where and what you invested, simpler tools or even just an Excel will do the trick. Check out Step 4 of my Beginner’s Guide to learn more about different ways to keep an eye on your investments.
Watch out for currency fluctuations
When you invest in currencies other than your own, fluctuations in the exchange rate can boost or eat up your performance. Either way, the foreign currency adds an additional layer of uncertainty on the return you can expect. Say you live in Belgium and your own currency is the Euro. Investing in British Pounds, US Dollars or Swiss Francs allows you to make use of additional investment opportunities and add geographic & currency diversification. But the risk stems from the other currency’s increase, decrease or just fluctuation in value compared to the Euro.
The two examples below show what I mean:
An investment of 1’000 Swiss Francs (CHF) cost an investor 930 € in November 2020, but was worth 1080 € five years later because the Franc gained value against the Euro. That’s an extra 2.5% per year on any return the investment already generates!
On the other hand, an investment of 1’000 US Dollars (USD) cost 840 € in November 2020 and was worth 860 € five years later. That sounds pretty stable, but in the meantime there were wild fluctuations of over 20% which is relevant if you have to sell
I myself was unlucky enough to invest in Euros while my currency was the Swiss Franc. So instead of gaining an extra return on my capital every year, I lost 2.5%. When investing in stock funds you can reduce the risk by investing in “hedged” products. But otherwise it’s something to watch out for and to manage expectations.
Foreign exchange fees
Apart from currency fluctuations, investments in other countries often also mean additional fees that you pay to the bank when transferring money in a different currency. This could be through your credit card bill when you buy something online or whenever you buy shares or another investment in a foreign currency. These fees are often not very transparent. The fee you may see on your credit card bill on vacation could be just 1% (although it’s often higher), but what you don’t see easily is the hidden fee the bank charges by giving you a worse exchange rate, which can be another 1-2%. This quickly adds up.
To check how much your bank charges you, compare the exchange rate shown on your last transaction statement with the “interbank rate” (use Google to find it; don’t forget to check the exact date the transaction took place).
Fortunately, the fee can easily be avoided nowadays. Neo-banks such as Revolut and others allow their users to exchange currency using the interbank rate or something close to it. But you’ll have to decide if the extra effort of shuffling money between accounts is worth the savings.
Personal Example:
- Because I don’t pay extra fees in my own currency Swiss Francs (CHF), I top up my Revolut account in CHF with my credit card or a bank transfer.
- For my impact investments, I transfer the money directly to the target account, which is usually in EUR or GBP. The money is taken directly from my Revolut CHF account, converted into EUR at the interbank rate and sent to the recipient.
- When I buy shares, I do so via my normal bank no matter the currency. But to save my bank’s exchange fees, I transfer the money first to Revolut, before transferring it back to the EUR account I have with the same bank. It’s a bit complicated, but it allows me to buy shares in other currencies at no extra cost. The easiest way might just be to find a (neo-) bank with very low fees and good exchange rates.