Buy dollars at 950?

Right now, implementing a portfolio is not comfortable. The U.S. stock market is very close to its all-time high, fixed income has been more volatile than usual and the exchange rate is around 950 pesos.

The key question is: Does the high value of the dollar affect the performance of a diversified portfolio? Undoubtedly the exchange rate is very relevant. However, a portfolio that invests 50% in the U.S. stock market and the other 50% in Chilean stocks is not necessarily hurt by investing with a high level of the U.S. currency.

Since 2002, when the exchange rate has been above 700 pesos per dollar, the 12-month return of this portfolio has been even higher than average.

Even though this example is illustrative and should be taken “with a pinch of salt,” the interaction between financial assets explains this effect. When the dollar falls, risk assets perform positively. The correlation between the dollar and local equities is—on average—negative, since when the local economy improves, the peso appreciates and vice versa.

Therefore, the inclusion of foreign assets and exposure to the dollar should remain structural for portfolio diversification.

However, risk management is crucial. It's prudent not to acquire all the dollar exposure at once, but to do so gradually to minimize the risk of an unfortunate moment in time.

This column was originally published in La Segunda [LINK]