What is the biggest risk of investing in foreign bonds?

    Published: 06-16-2009
    Views: 10,536
    Financial Advisor David John Marotta explains the risks involved with investing in foreign bonds.

    David John Marotta

    David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

    Host: What is the biggest risk of investing in foreign bonds?

    David Marotta: The biggest risk investing in foreign bonds is currency fluctuation. So, if you invest in a foreign bond in Europe and it pays 10,000 Euros when it matures, then those 10,000 Euros get translated back into Dollars in another 10 years when the bond matures. Well, depending upon what the Euro does against the US Dollar, you will make the interest on the bond but you'll also make more or less depending upon currency fluctuations. During times when the Dollar is appreciating in value against the Euro, you'll make less money and it will eat into your returns. But during times when the US Dollar is falling against the Euro you'll end up making even more. So, for example, in 2002, when you could buy a Euro at the beginning of the year for about 80 cents on the Dollar and at the end of the year, you could buy a Euro for a cost more than a $20. So, 80 cents to a $20, foreign bonds in 2002 make 40% interest and that was interest plus currency fluctuation.