Your International Stocks Might Be Losing 25% More Than You Think

Imagine you invested $10,000 in a Japanese stock that gained a respectable 10% last year. You check your brokerage account, expecting to see $11,000, but instead, you see $9,500—a loss. This isn’t a glitch; it’s the invisible force of currency exchange rates silently reshaping your investment returns, and most investors have no idea it’s happening.

The Invisible Currency Tax (or Bonus)

When you buy a stock on an international exchange, you’re making two bets at once. The first is obvious: you’re betting on the company to do well. The second, hidden bet is on the currency of that country to hold its value, or even strengthen, against your home currency.

Think of it like buying a souvenir on vacation. You buy a beautiful leather wallet in Italy for €100 when the exchange rate is 1.10, meaning it costs you $110. A year later, your friend wants to buy the same wallet, but now the exchange rate is 1.00. The wallet still costs €100, but it only costs your friend $100. The value of the asset (the wallet) didn’t change in its local currency, but its value to you as a U.S. dollar holder dropped by nearly 10%.

This is precisely what happens with your international stocks and bonds. Let’s make it real. In 2022, the MSCI EAFE Index, a common benchmark for developed international stocks, fell about 14.5% in local currency terms. But because the U.S. dollar strengthened so dramatically that year, a U.S. investor holding an unhedged EAFE fund (like the popular ETF, EFA) saw a loss of nearly 20%. That extra 5.5% loss had nothing to do with the performance of companies like Nestlé or Toyota; it was purely a currency effect.

Diversification or a Hidden Currency Bet?

You’ve been told to diversify internationally to reduce risk. But here’s the “aha moment”: for most people, international diversification is just swapping stock market risk for a massive, unmanaged currency risk they don’t understand. You thought you were buying a basket of global companies, but you were also unknowingly shorting the U.S. dollar and going long on the Euro, Yen, and Pound Sterling.

This isn’t a small effect. According to a 2022 Vanguard research paper (“Going global with bonds: The case for currency hedging”), currency volatility can be a massive component of an international portfolio’s risk. For global bonds, they found that unhedged currency risk accounted for roughly two-thirds of the portfolio’s total volatility. For stocks, it’s less dominant but still significant, often adding 8-10% of annual volatility to a portfolio. That’s a wild, unpredictable ride you didn’t sign up for.

The core problem is that this risk is invisible on almost every brokerage platform. You see your total return, but you have no way of knowing how much of that gain or loss came from the underlying stocks versus the fluctuation of the Japanese Yen. How can you manage a risk you can’t even see? This is precisely the kind of blind spot that modern tools can solve. For instance, the baln app’s AI diagnostic can analyze your holdings across all your accounts and give you a clear, quantified breakdown of your currency exposure. It can tell you, “32% of your portfolio’s risk is tied to fluctuations in the Euro and Yen,” turning a vague worry into a manageable data point.

To Hedge or Not to Hedge?

Once you see your exposure, the logical next question is what to do about it. The primary tool is “currency hedging.” This involves using financial instruments to lock in an exchange rate, effectively removing the currency variable from your investment return. You can do this yourself (which is complex and expensive) or buy funds that do it for you, often labeled with “Hedged” in their name.

So, should you hedge? The debate is fierce.

The Case for Not Hedging: Over the very long term (think 20+ years), currency effects tend to wash out. A strong dollar cycle is often followed by a weak dollar cycle. Proponents of this view, often citing a famous 2010 study by Campbell, Medeiros, and Viceira in the Journal of Financial Economics, argue that currencies are a unique source of diversification and that hedging costs will eat into your long-term returns.

The Case for Hedging: This camp argues that while currencies may even out eventually, “eventually” can be a painfully long time. Who wants to endure a decade of underperformance just because of currency trends? Hedging dramatically smooths the ride. Take the ten-year period ending in 2023. A U.S. investor in an unhedged EAFE fund saw an annualized return of about 5.8%. An investor in a currency-hedged version of the same index? They pocketed 8.5% per year. That’s the difference between turning $10,000 into $17,500 versus $22,600. The underlying stocks were identical; the only difference was stripping out the currency risk.

A practical middle ground is often to hedge international bond holdings, where the stability is the whole point, and consider a partial or no hedge on stocks, where you’re already taking on higher volatility.

Your Actionable Takeaway

You don’t need to become a foreign exchange trader overnight. But you cannot afford to ignore this risk any longer.

Here is your one action item for today: Log into your brokerage account. Look at your international stock and bond funds. Read the full name of the fund. Does it have the words “Currency Hedged” in the title? If not, you are carrying 100% of the currency risk. Now you know. And knowing is the first step to building a truly resilient portfolio.