The uncertainty about the value of the dollar during its current tumble raises lots of questions about where to put your cash. You're probably wondering, is there any true safe haven today? You may be thinking the only true safe haven is placing your money under your mattress, but that won't work out very well for you. Your money won't be lost to a stock or bond market slide, but you'd be giving up any chance of increasing your portfolio's value. If the dollar truly does fall or inflation kicks in, it could be worth a lot less.
So where do you turn in this unsettled market? Many think asset allocation is dead, but I'm still a big believer in that old style of investing, even with the current ups and downs of the marketplace. Allocating your portfolio with the proper mix of assets will give you a hedge against just about any situation. The four main choices -- stocks, commodities, bonds and cash -- give you many options for managing your portfolio.
So what are the pros and cons of each?
* Stocks -- When the dollar is weak stocks tend to go up. When a currency falls it creates inflationary pressures and investors jump back into the stock market. Mild inflation helps stocks, but if inflation continues on an upward spiral out of control everyone gets hurt. Now that the dollar has slipped 12 percent since March (when the stock market was at its low), you can see a steady upward climb in stocks as the dollar fell between March and June. But, if the dollar takes an even steeper tumble no one knows how bad it will be for stocks but it won't be good news. "The stock market bubble, the Treasury bubble, the real estate bubble - what is the common link between all three bubbles? The dollar." Lee Markowitz, partner of Continental Capital Advisors, told CNBC. "The end is near for all the bubbles because the dollar is getting so much pressure from currency markets and politicians around the world."
* Commodities -- Gold and oil are the biggest beneficiaries of investor dollars when investors seek commodities for safety. Commodities provide a good hedge against both a dollar fall and a stock fall. In addition to gold and oil, two other necessities of life - timber and water - can make a good mix of safe commodities to hold. But, right now could be a bad time to buy gold because gold is nearing record highs. "Gold is getting close to a record high. It will be interesting to see how these factors sort themselves out," Rich Berg, CEO at Performance Trust Capital Partners told CNBC.
* Bonds -- When it comes to safety, the safest types of bonds are U.S. Treasury's but some question how long that will be the case as the U.S. government continues to add to its deficits. Even Ben Bernanke wants to put on the brakes. But will the U.S. act quickly enough to prevent a further slide in Treasury yields? Investors are staying on the short end of the yield curve and showing a definite preference for 2-year notes rather than long-term commitments. China has been watched the closest. "What the Chinese are doing is moving some of their long-term assets into short-term so they can make a quick exit strategy," Peter Navarro, an economist at the University of California, told CNBC. But, bonds are still seen as a safer haven than stocks. Yet Navarro said China is "setting up all these bilateral currency deals with countries around the world so they can back the dollar out. We are literally living on borrowed time."
* Cash -- Cash is thought to be king, but which currency. Holding a balanced portfolio of currency including the dollar, British pound, euro, Swiss Franc, and Yen can give you a hedge, but knowing what the right mix will be at any given time requires a good knowledge of world politics and world economics. Foreign currency traders take years to learn their trade, so if you're thinking of adding a foreign currency mix to your portfolio, researching and selecting a professionally managed fund would be your best bet unless you know you can handle the wild world of foreign exchange trading - where you can lose thousands in minutes.
As an investor, know your options, but hedge your bets. Decide on a asset allocation that will let your sleep at night. Investing is treacherous right now, but hiding your money under a mattress is not the best solution.
Lita Epstein has written more than 25 books including the Complete Idiot's Guide to Value Investing and Complete Idiot's Guide to Foreign Currency Trading.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »