Check foreign currencies for diversification
The United States dollar up until 1971 was essentially backed by gold, which meant foreigners holding our currency could exchange it at any time for a measured amount of physical gold.
President Richard Nixon eliminated this right to exchange dollars for gold when he “closed the gold window” Aug. 15, 1971. He also imposed a 90-day wage and price freeze and a 10 percent import surcharge in an attempt to stabilize the economy and combat runaway inflation, which was a result of government deficits incurred in the preceding years from the Vietnam War and President Lyndon Johnson’s “War on Poverty.”
Since the U.S. dollar would no longer be measured by how much gold you could exchange it for, it was determined instead that the U.S. dollar would be measured by a basket of other currencies.
Today, that basket contains different mixes of the Euro, the Swiss franc, the Swedish krona, the British pound sterling, the Canadian dollar and the Japanese yen
Whereby investors prior to 1971 might have purchased gold to protect themselves against a declining U.S. dollar, investors could use the new measuring stick for protection, and that meant owning foreign currencies.
Most typical investors don’t hold foreign currencies in their portfolios due to the fact that the basic concept is, well, foreign. But owning foreign currencies is fairly easy to understand and to implement in your portfolio.
The concept is a simple one. By owning certain foreign currencies, if the U.S. dollar loses purchasing power (falls in value resulting in inflation), since it is measured against other foreign currencies, the investor would offset the lost purchasing power of the dollar through the corresponding increase in the foreign currencies he owns.
Visualizing the old playground teeter-totter works well in this example. If one side goes down (the U.S. dollar), the other side goes up (foreign currencies). Obviously owning just any foreign currency doesn’t qualify, but since we know which currencies the U.S. dollar is measured against, owning all of those particular currencies or even just a few of them might help protect an investor against a U.S. dollar decline.
Buying foreign currencies for the average investor used to mean a trip to the airport or foreign country, as the tradable currency markets known as the Forex usually meant margin accounts (borrowing money), highly speculative options and fast moving markets, which could spell disaster to novice investors.
Today, buying foreign currencies is made easy through a variety of funds that are traded just like stocks and can be bought in most brokerage accounts. Unlike stocks, however, you don’t own any companies, just the currencies or a facsimile thereof. Some currency funds actually own the currency, and others attempt to mirror a currency’s moves thru active management. There are many mixes of currencies you can choose from or you can own a specific one. There are also institutions that offer FDIC insured savings accounts and CDs, which are much like regular savings accounts except the money is denominated in whatever currency you desire. Some of these accounts and funds even pay a dividend that can be higher than what is paid on U.S. savings accounts and typical dollar denominated CDs.
For more diversification, you might look into foreign currencies as an alternative to just investing in stocks and bonds, but as always, understand all the ins and outs of anything you are considering buying.
This article expresses the opinions of Marc Cuniberti, who hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is http://www.moneymanagementradio.com.
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