General

I have an investment question

So it seems like the common saying is "If you want less currency risk, invest less in foreign equities". And that's why in Canada, we have a lot of people allocating almost half or more of their equity portfolio in the Canadian market.

But let's say that you had 100% in Canadian equities. You would think that you took currency risk out of the equation completely.

When it's time for you to retire, the Canadian dollar appreciates. Great! Most Canadian investors will be glad that they didn't have a lot invested in foreign currencies. They would think "yay! Good thing I didn't expose myself to currency risk!!" This is the reasoning behind the high Canadian equity allocation in many Canadian investors' portfolios.

BUT let's say the Canadian dollar depreciates.

If you had a lot of holdings in foreign currencies, the depreciation will work in your favour. But this is not the point here. We know that currency risk can work for or against you.

Here is my main point:

If you had all of your equities in CAD, wouldn't you be negatively affected by this currency swing?

Although you aren't directly experiencing the effect of depreciation because you are not converting USD investments into CAD cash, almost all the things you buy in Canada are imported. Even if your Canadian investments didn't move in value on paper, your purchasing power would become weaker as the price of most goods in Canada would increase. No?

So in fact, avoiding foreign investments is actually a bad thing when it comes to managing currency risk?

So what's the optimal ratio? Wouldn't you want half of your assets in Canadian dollars and the other half in foreign currencies to balance out this risk? And since your housing price, income and fixed income goods are going to be in CAD, it's better to go much lower in your Canadian equity allocation to actually AVOID currency risk? Like 10 to 20%?

Currently, people think that 50% or higher in Canadian equities is a good protection against currency risk. But isn't that actually false if what I am saying is true?!