The Case For Currency Diversification: A Problem for the 21st Century Investor | Get Financial Freedom Tips | Transform Your Financial Future


Tuesday, February 7, 2012

The Case For Currency Diversification: A Problem for the 21st Century Investor

You want to build your savings, invest wisely, and retire well. That is the American Dream, isn’t it? Investing in mid-20th century was pretty easy. All you had to do was save a decent amount of cash every year, invest it in a broad-market index, diversify a bit, and over the course of 20-30 years, you could build up a sizeable nest egg.

The Case For Currency Diversification:  A Problem for the 21st Century Investor
Today, however, things are different. The stock market is most likely not going to rally at the same rate of growth over the next 50 years as it did over the last 50 years. Also, our economy is now global. South America used to be a place you would maybe go on an exotic vacation. Now, Brazil is one of the most powerful emerging economies in the world.

Over the last 50 years, the U.S. dollar has never been in question as the world’s reserve currency. That is now changing, however. The emergence of China and other developing nations as legitimate super powers has changed the currency investment landscape. Right now, the global economy is still in bad economic condition. We are still experiencing a hangover from the fall of 2008. Small business loans and other forms of credit are still very difficult to secure.

Just a few weeks ago, the Federal Reserve announced that it intended to keep short-term interest rates at near 0% through the end of 2014, and more than half of the Fed board members actually believe it will be into 2015.

How Currencies Move

At the most basic level, currencies tend to move according to the interest rate target that a Central Bank sets for it. The higher the interest rate, the more attractive the currency is for investors. Therefore, when a currency has a high interest rate it will tend to rise in value and when a currency pair has a low interest rate, it will tend to fall in value. Now, there are exceptions to this in the near-term, but this is the general rule of thumb.

Now, if the Fed has announced it is going to keep interest rates near 0% for several years yet, what do you think will happen to the value of the U.S. dollar? Of course, it is most likely going to fall. Previous generations of investors have never had to be overly concerned with a devaluation of their currency. Today’s investors, however, do need to consider this when developing an investment portfolio.

Currency Diversification

It may be a very good idea to consider diversifying your currency holdings even if you are applying for a small business loans. Right now, you probably have all of your investment capital in U.S. dollars. It may be a wise idea to diversify those holdings. The best way to do this is to meet with a Certified Financial Planner in your area and discuss options. You can take very small unleveraged positions that are not speculative in nature, but act as a hedge in order to protect you in case of a multi-year, or even multi-decade, weakening of the U.S. Dollar.

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