Stock Tip - Pay Attention to the CDN-USD Exchange Rate

A VALUABLE STOCK TIP FOR CANADIANS

Only buy American stocks when the Canadian dollar is at par or above parity with the US dollar. (This usually happens when oil prices are really high.)

Let's say you buy $1000 worth of Google stock when the CDN dollar is on par with the US dollar. Then you wait 2 years, the Canadian dollar drops in value by 20%, but Google might go up in value by 20%. You sell it for 1000 x 1.2 x 1.2 = $1440 CDN thanks to the ever changing exchange rate.

So you just got a return of 44% for a 2 year investment in a stock that is pretty much guaranteed to go up.

However let's pretend you did the opposite... Let's say you bought the stock when the CDN dollar was down in value, and sold the stock when the CDN dollar was up in value and on par.

So 1000 x 0.8 x 1.2 = 960 CDN.

See the problem? Even though the stock went up in value by 20%, you still lost money because of the changing exchange rate.

And this is why Canadians should NEVER invest in American stocks unless the exchange rate is in your favour, and you should only sell when the exchange rate benefits you selling for a bigger difference.

Unless of course you like losing money even when your stock goes up. You'd have to be a bit soft in the head to not pay attention to the exchange rate.