UBS offers a step-by-step guide to currency allocation

Investing.com -- In a recent note to clients, UBS outlined a practical, seven-step guide to help investors structure currency allocations more effectively, based on personal spending needs, long-term goals, and risk tolerance.

“As we’ve seen in 2025, currency markets can be volatile. By aligning investments with one’s future plans, investors can reduce the risk that currency swings will affect financial goals,” UBS strategists led by Kiran Ganesh said in a note.

‘Step 1: Assess the currency mix needed for the present.’

According to UBS, investors should start by estimating the share of their spending across different currencies over the next five years. This typically reflects current residency but may include expenditures abroad, such as travel or property maintenance.

‘Step 2: Build estimates for the likely currency mix over a lifetime.’

Strategists note that future expenditures may change due to retirement, healthcare, or relocation. Thus, they suggest developing long-term estimates for currency exposure based on expected life changes over the next 5–20 years.

‘Step 3: Consider legacy and long-term currency needs.’

Next (LON:NXT), high-net-worth individuals may prioritize multi-generational wealth preservation.

“A neutral mix of key currencies that aims to preserve the long-term global purchasing power of their assets… may offer a way forward,” strategists write, advising a blend based on factors like economic strength, current account balances, and safe-haven status.

“Depending on their priorities—ranging from liquidity to interest rate differences (carry), stability, and/or risk management—investors can then tilt toward currencies that are strong in the respective criteria,” the team added.

‘Step 4: Scale time horizons to create a target currency allocation.’

The weight given to each time horizon should depend on age, clarity of future plans, and the importance of legacy goals, UBS explains. A younger person may focus more on short-term needs, while older investors may lean into legacy planning.

‘Step 5: Adjust for income, business assets, and debts.’

According to the guide, future income in a specific currency can reduce the need for portfolio exposure in that currency. Debts, meanwhile, may require an offsetting allocation to avoid mismatch risks, strategists explained.

‘Step 6: Perform a “gut check” and adjust.’

UBS also suggests testing assumptions by simulating a 20% depreciation in the largest currency holding. If the result is emotionally or financially uncomfortable, allocations may need revision.

“Adjustments can be made to achieve a balance that aligns with investors’ financial goals and psychological comfort,” the note states.

‘Step 7: Take steps to reflect your ideal mix in your portfolio.’

Lastly, options range from buying currency-hedged balanced portfolios to rebalancing existing assets. More sophisticated investors might use hedging or structured products, strategists said.

“Gaps can often be closed through two key steps: buy high-quality fixed income in needed currencies” or hedge existing equity exposure.

Investors can also consider structured solutions, though UBS notes these come with risks such as leverage and potential margin calls.