When creating a portfolio, we must keep in mind that an important factor in assessing risks is the small risk that promises to devalue the developing investment. Every investor must realize which currency is reference for him, ie. in which I will swear and give my input. Especially recently, the term reference currency has been mentioned more frequently in our country, especially in connection with the implementation of the euro around 2010.
For most Czech investors, the reference for me is the Czech crown. In Czech crowns, use the achieved return, and even if you invest, for example, in funds held in dollars or euros, the proceeds will flow into the Czech crown. The only one who performs the execution or reinvestment of profits in foreign currency, has another reference currency, and it is the dollar or the euro.
Although the koruna is the reference for me, whether you invest in a foreign currency or not is determined by your risk acceptance rate. The difference is whether you invest your funds in risky instruments, such as stocks, etc., or you invest in a more conservative way – let’s say in bonds.
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For long-term conservative investors, the currency risk associated with investing in foreign bonds or bond funds conducted abroad and investing in foreign bonds is relatively unnecessary. By investing in other than the reference currency, you speculate on the development of the exchange rate and expand your portfolio by an excess risk component.
Unfavorable development vs deprivation of total profit
An example of how the exchange rate may devalue the income of a conservative investor is the KBC Renta Dollarrenta fund. This fund invests heavily in liquid bonds denominated in dollars and this fund is thus managed in dollars. In the last five years (in the period 2000 – 2004) he issued 36.88, ie about 7% of ron. So the dollar investor will be satisfied with me. Not a Czech bag for which the Czech crown is the reference. For?
At the turn of the year 2000, the US dollar cost 36 crowns. In June of that year, the dollar cost 41 K and the Czech investor earned not only the fund’s return on the exchange rate difference, which was another 14% on top. Then the dollar began to fall and at the end of last year it was sold for only 23 K, which is a loss of around 36% for the period under review. Practically the total revenue was thus devalued by the development of the exchange rate. As the same development is expected in the near future, it will be especially suitable for conservative investors to stay with koruna investments. For the sake of completeness, we must add that the fund focused on Czech bonds and managed in Czech crowns, KBC Renta Czechrenta, brought the Czech investor an appreciation of 37.24% in the period under review.
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Euro or koruna?
The situation with the euro seems to me a little different. The changeover to the euro in 2010 raised questions about whether investors should focus on euro funds, and whether it is better to repay and deposit the pension in assets held in Czech crowns. The growth of labor productivity and the economy as a whole, together with the influx of foreign investment, are currently on the side of those who are staying with investments in crowns. On the other hand, a large transfer of profits from quick investments back abroad and thus unfavorable state of public finances can be loaded into the cards of investors in euro funds. As a result, it will depend on the development of annual rates and the CZK / EUR exchange rate.
Unlike a conservative investor, a dynamic investor, who invests primarily in equity funds, does not have to take the same risk into account as in the case of his conservative counterpart. Due to the willingness to accept a range of risks, speculation on the development of the exchange rate may be a source of expected profits for him.
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It is very important to pay attention to the branch or the region to which the selected fund directs its funds when selecting the fund. Even if, as an investor, you decide to invest in the fund in Czech crowns, the fund investing only in Czech shares practically does not exist, you also have to take a new risk.
The Czech conservative investor should be able to accept the euro in the Czech Republic as a reference currency. If he invests in another currency, not the Czech crown, his portfolio loses the mark of conservatism. He is speculating on the development of the exchange rate, and with it a big risk pin. Dynamite investors are unlikely to avoid the currency risk, in terms of their propensity to risk, this may mean a difficulty for them to achieve the return.
Do you prefer investing in Czech crowns, or are you willing to take less risk and try other currencies? Drink nm, dark on your ideas and experiences.