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I have come into some US money via inheritance. Currently I have it sitting in my TDW trading account. I would like to know the best way to manage this:
- leave it in my TD US trading account and buy US ETFs (Vanguard)
- convert to Canadian $ and merge with existing portfolio
- convert to CAD and pay down mortgage (3.8%)

I follow a EasyChair strategy holding cash, bonds (40%) and Cdn/US indexes (60%). My plan is to take the new money (roughly equal to my current holdings) and invest in Vanguard, sticking with my allocation but in US markets.

The risk is that I am exposed to USD/CAD fluctuations, and I gather some withholding on the capital gains of the US stock. The upside is I don't have to convert at what is close to an all-time CAD high. As well, there is a chance I will move to the US for a job in a few years, whereby the exchange rate risk would be eliminated.

Any thoughts would be welcome.
 

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strange that no one has answered you yet, so i'll have a humble go at it. There are some dedicated currency hedgers in this forum, and i would have thought that one or more would be out by now, preaching the urgency of hedging every transaction into a home currency which you must select this instant, whether you wish to or not.

but the fact is that millions of canadians have US spouses, businesses, partners, cottages, condos, clients, jobs, bank accounts, investment portfolios and kids attending schools and universities, and they don't hedge every hiccup like a monk with a flagellum. One could probably assert that the majority don't hedge at all.

my own portfolio includes 3 different currencies. The 3rd currency is highly differentiated from CAD and USD, so taken together, and over time, this triad acts as a natural hedge.

and over a long period of time, something similar will happen to a portfolio divided between CAD and USD. If one discounts both the extreme US dollar bulls and bears, one finds US presently wallowing at the lows that are making you hesitate about converting the whole shebang into canadian, as you mention.

so i wouldn't see any harm in keeping USD at least for a period of time while i learned more. I might add some precious metal as a minor hedge. An ETF like GDX - which i believe is a vanguard fund - or perhaps GLD.

one tiny detail: there is no US withholding on capital gains. Non-resident withholding tax is imposed on US dividends.

the NR WT rate is 15%, and you will get to claim a credit for nearly all of it on your canadian income tax return. What is more noxious to canadian investors is the fact that US dividends are taxed in canadian hands as straight income at 100%, just like interest income. In other words, US capital gains are the taxation vehicle of choice, because they benefit from the 50% inclusion rate, while US dividends pale in attractiveness when compared to canadian dividends with their healthy dividend tax credits.
 

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1) Where to invest? All depends on what return you think you will get from the ETF's after-tax . Since paying the debt is risk-free and the ETFs are quite risky I would choose to paydown the debt if the difference in expected returns is less than (say) 3%. You make your own risk tradeoff.

2) Convert to Loonies? You have figured out that your FX risk depends on where you will be in the future correctly. But it is not exactly where you will be working that matters. It is where you will eventually be spending the savings. I.e. if you move to the US and buy a home there, holding Loonies exposes you to FX risk. If this pot of $$ is for retirement in Canada, then holding US$ exposes you to FX risk.

I DO recommend hedging currency risk in your investments, especially when the trend is against you. Specifically the US dollar incorporates huge risks of falling from grace. But that is from a Canadian's perspective, spending money in Canada. You cannot hedge FX risk if you cannot identify where the risk lies. I hope all my posts make it clear that the person has to identify that risk first.

If you cannot say, now, where you will be spending your savings, the question is "Do you make a decision one way or the other, or do you keep your assets unhedged half in one currency, half in the other?" Personally, assuming the probabilities were about 50:50, I would put all my bets on the future I WANT, the one I am working for. In your case, if you want to retire in the US that means converting Loonies into US dollars now. This would have the effect of making 'failure' more hurtful (because you will have the FX losses) and give you more incentive to work harder toward your goals.

If you split your probabilities, each outcome will incur a cost. Both 'failure' and 'success' will incur half costs. To me, that is striving for mediocracy. It's a personal decision.
 
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