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The Dollar is Dropping: How Does It Affect Your Pension and What Should You Do?
Recently, we have witnessed a trend of the Dollar weakening against the Shekel. For those planning a vacation abroad or shopping on Amazon, this is great news. However, for hundreds of thousands of savers in Israel, exchange rate fluctuations raise a critical question: How does the falling Dollar affect the money we are saving for retirement?
As a leading insurance and finance agency, it is important to us at Oren Mizrach and Goldfus that you understand the direct link between foreign currency and your future annuity.
Why Does Our Pension “Speak” Dollars?
Over the last decade, institutional bodies (pension funds, provident funds, and executive insurance) have significantly increased their exposure to foreign markets. The reason is simple: the Israeli economy is small. To achieve high returns over time, investment managers buy stocks and bonds in the world’s leading stock exchanges, primarily in the U.S.
When your pension fund invests in the S&P 500 index, it does so in Dollars. Therefore, your final return is composed of two factors:
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Asset Performance: Did the stocks go up or down?
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Exchange Rate: Did the Dollar strengthen or weaken against the Shekel?
The Double Effect: When the Market Rises and the Dollar Drops
In many cases, we see a “negative correlation”: when the American stock market rises, the Shekel tends to strengthen and the Dollar weakens.
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The Meaning: Even if your foreign investment portfolio recorded a nice profit of 5%, if the Dollar dropped by 3% during that same time, the Shekel-denominated return in your quarterly report will be significantly lower.
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The Risk: A sharp and continuous decline in the Dollar rate can “eat away” at a significant portion of the profits accumulated in international markets.
Important to know: Pension funds use “hedging” mechanisms—financial protections designed to reduce the impact of a falling Dollar. However, hedging is not total in most tracks, and currency fluctuations still have a direct impact on your savings balance.3 Steps to Manage Your Savings During Volatility
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Review Your Investment Track: Are you in a foreign-oriented track (like an S&P 500 tracker)? If you are close to retirement age, you may want to consider tracks with lower foreign currency exposure to protect the principal. If you are young, the volatility might actually be an opportunity to purchase assets at a cheaper “Dollar price.”
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Geographic Diversification: Check with your Goldfus insurance agent whether all your exposure is in Dollars, or if there is room to integrate assets in Europe or the local market to avoid dependency on a single currency.
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Don’t Act on Impulse: The capital and foreign exchange markets are cyclical. Rash decisions to change tracks following a temporary drop can lock in losses and prevent you from benefiting from the correction that follows.
Professional Guidance by Goldfus & Oren Mizrach Group
Managing a pension in an era of exchange rate instability requires expertise. We are here to help you analyze your reports, understand your level of exposure to foreign currency, and tailor your investment strategy to your personal needs and time horizon.
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