SMSFs warned on risks with foreign exchange trading

SMSFs have been cautioned by an advice firm against investing in foreign currency as the foreign exchange market is highly unpredictable and offers no income generation. 

GEM Capital financial adviser Mark Draper says SMSF investors should think very carefully before getting involved in foreign exchange, given the fact that there’s no actual asset involved.

“If you invest in shares in a company, you have equity in that company but when you buy foreign exchange, you’re not actually buying an asset. You’re buying a piece of paper and so I think SMSF investors need to ask themselves what the motivation is to be looking at currency at the first place,” Mr Draper warned.

Foreign currency also doesn’t provide an income stream and, therefore, it has similar risks to purchasing gold.

“It’s a bit like buying gold in that respect, because you’re relying on somebody else to buy it at a higher price, but if you get it wrong, there’s no return at all. The only return is if you can sell it at a higher price. So I would question whether it fits at all within a SMSF, other than to hedge a position,” Mr Draper said.

Even where SMSF trustees are planning to use an allocation to foreign currency as a hedge, he cautioned that this should only be done where the Australian dollar is at extremes.  

“You might take a position on a currency to protect against the rising [value], but with the Australian dollar currently at 0.73 to 0.74 to the US [dollar], it is roughly fair value at the moment,” Mr Draper said.

“I’d only take a position on the extremes and I don’t think we’re at the extremes at this point in time.” 

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