Ever noticed how the average holders of foreign currencies tend to clutch on to their dollars, pounds or francs as they rise in value against the shekel NIS), and only think about converting their foreign currency into shekels when the shekel is gaining in leaps in bounds? Instinctively we tend to think, “wow! It has already gone up 15% this year, maybe it will go up another 15%”. This mistaken analysis leads many people to do exactly the opposite of what successful money managers do – sell high and buy low. When the dollar sinks to an exchange rate approaching 3.3 or 3.2 NIS to the US Dollar, everyone starts selling dollars but when the dollar recovers and rises to a rate above 4 NIS, no one wants to convert. Hmmm – something seems wrong here.
I want to qualify the remaining analysis with the following caveat: I cannot (nor do I believe that the average person can) predict the value of the Israeli currency in neither the short nor long term. I can provide my own opinions and arguments in favor of this way or that, but ultimately the international currency markets are highly volatile, and I have seen incredibly experienced and successful currency traders lose 80% of their money overnight. Instead of trying to anticipate where currencies are headed, the average person should focus on one simple principle. During times of currency strength, hedge your bets and convert your money when your currency is strong. During times of currency weakness, don’t panic – stay put. Most major currencies fluctuate tremendously over time and there are enough significant movements to allow you opportunities to follow the rule above.
Most olim continue to have a financial connection with their former country and its currency and financial system. This might take the form of foreign currency monthly pensions and social insurance payments, or investments in their former country. People in those situations are therefore exposed to risk, related to the strength of their former local currency. But what are they to do as their monthly expenses are mostly in shekels, and they need to convert their money periodically into that currency. Many people are able to bring over money periodically and this flexibility allows them to follow the rule – sell when your currency is strong and have patience when it’s not. Not only will it reduce your currency risk, but it will provide you with the opportunity of locking in gains which is a surefire method for making money rather than losing it. So while you always risk losing out on future gains, you also prevent yourself from losing your current gains if a sudden correction materializes.
Is this always a surefire way to get the best possible rate, the highest value during the current month or quarter? No! Hitting the top on a consistent basis is nearly impossible. But to reduce your risk and lock in fluctuating gains, you don’t need to hit the top. You need to plan ahead and lock in gains at reasonable rates, when those opportunities arise.
So the next time you see the dollar jumping up, look at your assets and your future cash flow needs and evaluate whether this might be a good time to realize some gains and convert your money into shekels. Planning ahead and not holding out for that extra strong currency leap will reduce your overall risk exposure and lock in gains leaving you well ahead in the long run.