Traveling Overseas? Profit From the Exchange Rate

by Jean Chatzky
Photograph: Illustration: Chad Hagen

“Leather,” one person after another whispered in my ear when I mentioned an upcoming trip to Buenos ­Aires—as if they were in The Graduate pushing Benjamin Braddock toward plastics. And they were right! I picked up two gorgeous bags and a pair of shoes for the equivalent of $100. My husband got three handsome belts for $15 each. It was the epitome of smart shopping: Not only was inexpensive Argentine leather working in our favor, but so was cheap Argentine currency.

That our economy is becoming more global by the day is not debatable. The question is, In how many different ways can you profit from this situation? As it turns out: many. You can (and should) invest in international stocks; you can travel to countries where the dollar is strong and local goods are cheap; you can even buy real estate abroad. Whatever your plans, here’s your cheat sheet.
 

If you’re investing

“Most investors are not diversified enough internationally, particularly in growing areas like China,” says Burton Malkiel, an economist at Princeton and author of A Random Walk Down Wall Street. To reduce overall risk, at least 20 percent of the portfolio of a woman in her forties should be held outside the U.S. That can translate into more money: If you’d invested $10,000 in the S&P 500 a decade ago, it would be worth about $9,800 today, according to Ibbotson Associates. But if you’d invested the same $10,000 abroad (half in emerging markets, half in developed markets), it would be worth $19,400. And though some countries—­Greece, Spain—have taken their lumps of late, others, including India, Brazil and China, are expected to outdo the slow 2 to 3 percent annual growth rate analysts are expecting from the U.S. in the near future.

When you’re deciding what to invest in, think big funds with low fees, encompassing many countries. For example, consider international Exchange Traded Funds (ETFs), which have expenses about 60 percent lower than those of managed mutual funds. ETFs operate like index funds in that they invest in a set pool of stocks or bonds (or both) but trade like stocks. “The nice thing about ETFs is that they’re pretty easy to trade and they give you broad exposure to many different countries,” says Morningstar??.com analyst Michael Rawson. A couple of possibilities for stocks: the Vanguard FTSE All-World ex-U.S. and the iShares MSCI EAFE Small Cap. And for bonds: SPDR Barclays Capital International Treasury Bond and the SPDR DB International Government Inflation-Protected Bond.
 

If you’re traveling

You walk off the plane at Paris’s Charles de Gaulle airport, turn a few corners—and you hit one currency-­exchange kiosk after another. The fact that they’re so convenient should be a warning sign. These booths, like the money-changing shops on the main thoroughfares in Barcelona, Milan and most other major cities, are typically very expensive. At a storefront currency operation, rates will range from 5 percent to 10 percent over the wholesale interbank exchange rate, says Edward Hasbrouck, author of The Practical Nomad. Converting $500 this way could cost you $25 to $50. Instead, exchange a few hundred dollars at your American bank before you travel so that you can deal with transportation from the airport. Track exchange rates at such sites as x-rates?.com and xe.com. As for traveler’s checks, the old standby, they’re no longer popular, for several reasons: Their big selling point—they can be replaced if lost or stolen—is also true of credit cards, which are often cheaper to use. Also, it still costs money to exchange traveler’s checks for local currency, and there may be a fee to purchase them as well.

Once you’re abroad, the best place to get foreign currency is at an ATM. If you can find a machine that belongs to your bank, there will generally be no transaction fees and, typically, lower currency-exchange fees. On a machine not belonging to your bank, you’ll be charged three times: once by the bank that owns the machine, then twice by your bank, for the currency conversion and the transaction. Those rates vary: Bank of America, for instance, charges a 1 percent currency conversion fee plus a $5 transaction fee; Citi charges 3 per­cent plus $1.50; Chase charges 3 ­percent plus $3. On a $500 transaction, the fees would be $10, $16.50 and $18, respectively. Check your bank’s website before you travel.

Then pay for most things with your credit card. You’ll be able to use the consumer protections to dispute a purchase gone awry even after you return home. And you’ll be charged for your purchase at (or close to) the current exchange rate on that day. But here too you’ll probably pay a currency conversion fee, depending on the card you’re using. The fee is assessed on your purchase amount after the local currency is converted to dollars. These fees vary widely. Capital One charges nothing; Discover, 2 percent; American Express, 2.7 percent; and Chase, Citi and Wells Fargo, all 3 percent. Spend $10,000 abroad, and you’re looking at $300 in fees. If you travel overseas frequently, it may pay to open a Capital One card.

And don’t forget to call your bank and say you’ll be traveling. Though I used my credit card plenty in Argentina, I made one nearly fatal error. I didn’t call Citi, the issuer of the American Express card I share with my husband, to tell the company where we were going and how long we would be there. So when we tried to check out of Cavas Wine Lodge (an amazing ­vineyard-spa-restaurant-inn in the heart of Mendoza, the Argentine wine country), our card was denied. Twice. Knowing better, I asked the innkeeper to dial the toll-free number on the card; I told the rep what was going on, and our transaction was processed. I learned my lesson: From now on, every time I go somewhere unusual, I’ll let my credit card company know. “Notify your bank and credit card issuer about your trip,” says Bill Hardekopf, CEO of LowCards?.com. “Otherwise foreign charges may raise a red flag with your issuer, and a freeze can be placed on your account.”
 

If you’re buying a house

The numbers are difficult to track precisely, but the U.S. State Department estimates that Americans own as many as 640,000 homes overseas. What’s the appeal? For one thing, houses in other countries are often much cheaper. If you own property in the U.S., you could sell it when you retire and easily relocate to Mexico, Canada or parts of Europe. You’re also likely to find better values on vacation homes abroad. For example, a 2,200-square-foot, four-­bedroom, single-family home that would cost an average of $363,401 in the U.S. would cost $207,020 in Mexico City, $265,000 in Heredia, Costa Rica, and well under $200,000 in Venezuela.

Of course, as terrific as those prices sound, real estate values shouldn’t be your only consideration. If you’re looking at this property as a retirement home, think about whether you’ll feel isolated and also investigate the cost and availability of health care and home health aides. “Women in their fifties, like me, want places to stay that are modern, vibrant,” says Maria ­Masvidal-Visser, director of international relocation for Century 21 in Coral Gables, Florida, “where we’ll have a good time and continue to grow mentally.” Rent a home for several months before you buy to get a sense of the culture, and check out expatify?.com and alloexpat?.com for blogs and forums about specific countries.

If you decide to go ahead, enlist a broker who specializes in the country you’re considering. To find one, start at worldproperties.org, the website of the International Consortium of Real Estate Associations. That person can connect you with lawyers and tax professionals, help you find a property, advise you about the region and assist you with financing options. Finally, the broker can point you toward any tax breaks and other incentives offered by host countries to encourage investment.

And don’t sign on the bottom line without investigating the cost of living. Suzy Gershman, author of the Born to Shop guides, got burned that way. She bought a house in Provence for $100,000 and paid it off. Then, bam, the cost of a rotisserie chicken went from $6 to $20 (because of price increases as well as changes in the value of the euro). Utility prices jumped as well. “People keep saying to me, ‘How can you sell a house in France that’s paid for?’ ” she says. “But currency fluctuations and the cost of living can do you in—especially if you’re talking about a retirement budget.” To figure out how far your money will go in cities worldwide, try the cost-of-living calculator ­at easyexpat.com. There you can see that you’d need to earn $157,359 in Milan and $196,653 in Tokyo to live as well as you could on $150,000 in San Francisco. But you’d have to bring in only $85,713 in Mumbai.

Originally published in the November 2010 issue of More. Read more of Jean Chatzky's columns here.

First Published Mon, 2010-09-27 11:20

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