Currencies are not financial instruments which typically come to
mind when talking about long term investments. Vast majority of
financial advisors suggests a mix of bonds and stocks to their clients,
with some cash investments, like money market funds or CD's thrown into
the mix. Such is long standing, conventional wisdom regarding regarding
allocating money for a long haul and is almost universally practised on
"main street". The only difference is specific split among these asset
groups, in most cases related to the age of person. Virtually all other
forms of investments are considered "derivatives" and not suitable for
most people.
These views have been slowly changing over last few years, if not
decades. Explosion of hedge funds have brought alternative forms
of investments, other than stocks and bonds, into a vernacular of most
individual investors. Today just about everybody with any interest in
financial markets knows, at least in principle, what options, futures
and commodities are. More and more often these groups of securities are
mentioned as separate asset classes with a place of its own in a
carefully balanced investment portfolio. Same goes for currencies.
Popularity of spot Forex trading proves that currencies are great
trading instruments. Brokers report record numbers of accounts opening
every year, trading volumes keep rising and the most liquid markets in
the world are becoming even deeper. This is easily noticed when spreads
from just few years ago are compared to ones today. In many cases they
were cut by half, clearly outcome of increased activity as well as
competition for for clients among Forex brokers.
One of the characteristics of currencies often talked about is the
presence of unusually long and persistent trends. They often last
months and years and are the main reason behind inclusion of them into
main asset classes. But really, are currencies the kind of financial
instrument that could be put away for an indeterminate period of time
without more or less active portfolio management? Long term chart of
any one currency pair indeed reveals long term trends, but how does it
look like on bases of currency baskets, something that would have to be
done in order to minimize risks of any one currency exposure? Things
get a little different than.
This is a chart of how major currencies performed against a basket
of peers since 1970.
