Currencies do matter

Suppose an American investor was concerned the market was pricing risk assets too agressively relative to his estimate of fair value for the market index. The investor may decide to be 100% in cash and wait for the right moment (when risk assets are priced less than what he believes they are worth).

However, the USD depreciated 20% during the last 2 year. This means his purchasing power globally has declined, though he may say it has not locally (he would be foolish, in America many goods the investor purchases are made abroad, hence his purchasing power has decreased because his costs have increased whilst his capital has generated zero income due to 0% interest rates). Overall, his wealth has decreased by making what seems like a wise decision.

We can say he was wise because he lost less money than if he was invested 100% in the market - at least that seems to be the case for the moment.

However, the reality was he was foolish because he explicitily assumed (without even probably being aware) that the USD was the only currency in the world, hence why he only holds USD.

Making a decision to hold cash may be a good asset allocation decision when compared to bonds or equities and other risk assets - but it might not be the same as having held cash in AUD or SGD during that same time period as the investor was holding USD cash.

Furthermore, often when currencies decrease in value, their assets may increase in value. This typically happens in the US due to the strong faith people have in this currency. Hence when it weakens, many foreign investors buy US assets which seem cheaper relative to foreign currencies. Hence our USD American cash investor is priced out of the market and is forced to continue holding USD cash paying zero income if he keeps his same criteria.

To ignore that financial markets are becoming more globally interconnected and hence one must appreciate the cost of a security and the value of the money the security is priced in, is to be foolish and to ensure certain suffering.