Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
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Do I need downside protection?

July 14, 2017 - 2 comments

There’s no doubt about it: Losing money hurts. Even the fear of losing money is unpleasant. The financial industry is well aware of this, and sends out its sales force to peddle a comforting idea. It’s called “downside protection.” It’s supposed to allow you to continue enjoying the market’s expected returns while simultaneously dodging its correlated risks.

Or so the story goes. But when it comes to principal protected notes and other forms of downside protection, it’s usually not your interests being protected. Common sense tells us why.


The truth is, market risks and expected future returns are related. If you don’t take any risk, you should expect very low returns. This is why long-term investors are better off minimizing their costs, capturing the returns of the global markets using low-cost index funds, and controlling their level of risk through their mix between stocks and bonds.

The rest of any other sales pitch is costly smoke and mirrors. Want to see behind the subterfuge?
Watch today’s CSI, and I’ll walk you through the numbers. And subscribe here if you’d like to remain in the clear moving forward.

By: Ben Felix with 2 comments.
  14/07/2017 4:30:56 PM
Benjamin Felix
The logical answer to your question is that currency hedging is not necessary and adds costs. Currency has no expected return, it is therefore not expected to materially affect long-term returns in a portfolio. However, currency fluctuations can be large in magnitude and occur quickly, which can be an emotional challenge for investors to endure. If you do hedge currency, you do not typically want to hedge all of the currency in your equity allocation because currency volatility and equity volatility are similar in magnitude, but imperfectly correlated. This results in a diversification benefit. It's also worth noting that the cost of hedging is almost negligible at this point. There is no right answer, but a good rule of thumb might be to follow what DFA does in their global equity fund. They currency hedge 50%. I think that is a very reasonable approach.
  14/07/2017 1:24:55 PM
What are your views on à CDN resident retiree needing to hedge his foreign currency investments. Say has a large portfolio say CDN $10 mil all in asset based investments like DFA 25% fixed income 75% equity with 70% of equity in foreign Investments through DFA. Is there any rule of thumb or principals to guide on how much of ones portfolio that is not in CDN dollars should be hedged to protect against F/X swings?

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