Ep 424: Should you hedge your international share portfolio

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If you're following the case for going underweight Australian shares and leaning into global developed markets, you inherit a new question: what do you do about currency risk?

Every international investment has two return drivers: the underlying market, and movements in the Australian dollar, and this episode is a clear-eyed guide to whether you should neutralise the second.

Stuart explains what hedging actually does, why it never removes 100% of currency risk, and the single most misunderstood aspect of it: interest rate differentials. 

Because Australia's cash rate currently sits above the US, hedging US exposure earns a modest positive carry, but that relationship can just as easily work against you. 

He weighs the real trade-offs: the Aussie dollar is a "risk currency" that falls in a crisis, so staying unhedged can act as a shock absorber when markets tumble, while hedging makes more sense when the currency trades well below fair value.

He also covers a crucial and overlooked detail, the TOFA hedging election and its tax consequences, why bonds should almost always be hedged, and what the academic research says. 

The upshot: their default is unhedged for shares, favouring hedging only as the dollar approaches US60 cents.

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This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.