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For many Canadians the rise of the loonie is a source of patriotic pride not seen since Sidney Crosby scored the winning goal last winter in Vancouver. But as most investors know, the Canadian dollar's surge is a double-edged sword.

Sure, it makes cross-border shopping and European vacations more affordable. And the bargains in U.S. real estate look even more attractive when you don't have to pay a premium to convert your loonies to greenbacks.

But a careful look at your portfolio shows a more sinister effect. The combination of the loonie's rise and the market selloff of 2008 means it's likely your foreign equities and international mutual funds have given you little or no return over the last 10 years. The reason is simple: The value of those foreign holdings may have gone up – but only in terms of their "home" currency. When you convert the value of those holdings from that declining home currency into rising Canadian dollars, all too often the growth in value is wiped out.

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So what's a Canadian investor to do?

Much depends on your outlook for the Canadian dollar. Has the loonie flown just about as high as it is going to go, or is there more upside still to come?

Many experts think dollar parity is here to stay. BMO Nesbitt Burns Inc. says that while the loonie may be overvalued now, they expect it to trade at or above par with the U.S. dollar through this year – and next. Even the notoriously conservative Bank of Canada has adopted parity as its assumption for 2011.

Still, it's hard to find many experts forecasting a further sustained increase for the Canadian dollar. That perspective is reflected in the advice from most investment managers. Their collective years of experience managing portfolios with a low loonie contributes to their view that the value of the loonie is a rare opportunity to invest internationally, without paying a currency premium to do it.

"With the loonie's strength, a lot of people have seen their international fund returns disappear, in Canadian dollar terms," says Blair Falconer of HSBC Securities. "That's water under the bridge. Now the way to play the loonie is to put more money into international and U.S. equities, to take advantage of the Canadian dollar trading at levels that are arguably too strong."

Mr. Falconer oversees strategy for more than $1-billion in managed accounts. His firm sees the loonie trading at about 90 cents U.S. by the end of 2011. It is also "fairly bullish" on equities for this year, especially in emerging markets. "That combination tells us where investors should be allocating their money this year," he says.

While Mr. Falconer makes a strong case for buying abroad, some investors may be concerned about the currency effect burning them again. The way to do that is hedging – a broad term that covers techniques designed to make your portfolio resistant to currency fluctuations. But is hedging a good idea for most investors?

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John De Goey doesn't think so. He is a certified financial planner, and vice-president at Burgeonvest Bick Securities. He is also the author of The Professional Financial Advisor.

Mr. De Goey says investors should think about three things when considering hedging: costs, diversification and emotion. He notes the cost of any kind of currency hedging usually works out to 25 basis points, so the hedge seldom ends up having any value unless the currency moves at least that much – in the "right" direction.

On diversification, he notes unhedged portfolios actually have a natural diversification, since returns of investments denominated in different world currencies will fluctuate in different ways as those currencies go up and down. "Hedging can actually increase risk," says Mr. De Goey.

As he sees it, the only real justification for hedging is emotion. "Some people find they sleep better at night if they're insulated against currency ups and downs," he says. In those cases, investors may want to look at the currency-hedged iShares international ETFs, he says.

The most common advice from investment professionals is to use the loonie's rise as an opportunity to buy internationally. "There's never been a better time to pick up U.S. and international stocks," says Bill Wolfenden. He is chief investment adviser at Doherty and Associates in Ottawa. The firm manages about $1.5-billion in assets for extremely wealthy people.

"It's a golden opportunity to diversify into sectors where Canada isn't strong," says Mr. Wolfenden.

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Investment adviser Winnie Go at ScotiaMcLeod takes it one step further. She recommends multinationals that will benefit from the trend of a falling U.S. dollar, since they have many expenses in greenbacks but are receiving an increasing share of their revenues in foreign currencies. She includes McDonalds and Microsoft in that category. She also favours American energy plays such as Exxon.

Of course differences of opinion are what make a market, and there are certainly contrarian opinions when it comes to investing and the loonie. David Chapman of MGI Securities thinks the upward trend for the Canadian dollar will continue, as commodity prices keep showing strength and the world increasingly appreciates Canada's superior fiscal situation.

As a result, Mr. Chapman says "investing in U.S. stocks is not the place to be." Instead he recommends investing in Canadian equities, as well as directly in commodities through exchange-traded funds.

But Mr. Chapman's view is the exception. Most advisers are telling investors not to get too carried away with the loonie's rise. Some are even recommending a more basic way to protect against a fall in the Canadian dollar.

"If I was planning a trip to the U.S. in the next six to nine months, I would consider buying some U.S. dollars ahead of time," Mr. Wolfenden says.

March-break vacationers and summer car-trippers, take note.

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