How to Protect Your Investments From a Falling Dollar

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How to Protect Your Investments from a Falling Dollar Here's a question I get frequently: It's obvious the dollar is going to crash, so what can I do to protect my investments?

A compelling case can be made for the devaluation of the dollar: The U.S. is experiencing record deficits, the loss of our manufacturing base, slow growth and poor education; there's the conduct of the Fed, which some believe is "devaluing" the dollar; and overseas, we're seeing the strong ascendancy of Brazil, India and China.

Many investors are absolutely convinced the dollar is doomed. Here 's a list of options they want me to implement: Sell the dollar and buy stronger currencies, buy gold or other commodities, hold investments in accounts located in other countries, hedge against the dollar. Do any of those moves make sense?

No.

They're all based on the false premise that currency markets are mis-priced.

Whatever You Know, the Market Knows Too

All these concerns about the dollar are valid. The problem is that those concerns are well-known to millions of investors around the world. My clients don't know anything not in the financial media. All of that information is instantly factored into the price of all currencies.

Think about the way the market sets the price of currency and other assets. Traders and nontraders alike (because nontraders have made a decision not to trade), consider all available information, include future uncertainty, and establish a market-based price. Exchange rates are set in the same manner. As such, current prices are fair prices.

This analysis doesn't mean you can't make money speculating on currency or stocks. Prices go up and down. But what will move prices is tomorrow's news, and no one knows in advance what that news will be. Unfortunately, trying to predict the movement of the currency market is a zero sum game (or worse, given transaction costs). Here's something else to keep in mind: If you're so sure the dollar is doomed and you want to bet against it, who's on the other side of that trade? Presumably, that person has a contrary view.

Worried About America? Buy American Stocks?


Let's assume you have looked at the data and are convinced the U.S. economy is headed for disaster. Here's my advice: Buy stock in U.S. companies. Why? Because the buyers and sellers in the market have already priced those assets to reflect all of your concerns. The market has determined U.S. companies are risky assets, and what do we know about risky assets? Over time, the expected return on risky assets is significantly higher than the expected return on safer ones. Want proof?

The returns of the index measuring emerging markets -- the MSCI Emerging Markets Index (EEM) -- averaged 9.98% between 1989 and 2008 . The returns of the S&P 500 Index over the same period were only 8.42%. There's no doubt the companies in the S&P 500 Index were far less risky investments than companies located in countries such as Pakistan, Egypt and Turkey, where reliable financial data is hard to find.

I'm not suggesting you invest a significant portion of your portfolio in emerging markets: Most advisers would limit investments in them to 10% of your portfolio because of their extreme volatility. For example, in 2008, the MSCI EM Index lost 53.33% of its value.

Think Logically, Diversify Globally


Here's another example. From February 1955 to August 2010, the United Kingdom was in a steady decline, much like current predictions for the U.S. economy. During this period, investors in the FTSE All-Share Index (which measures the returns of U.K.-based companies) had an annualized return of 10.7%. The S&P 500 had an annualized return of 9.7%. Investors in the riskier asset reaped greater returns.

There is an intelligent strategy that will protect you against the risk of collapse of the U.S. dollar. It's global diversification, using low-cost stock and bond index funds. Global diversification of your portfolio reduces risk and increases return. A well-diversified portfolio captures the returns of the global economy, and should include the stocks and bonds of more than 12,000 holdings in 43 countries around the world.

Don't engage in risky and discredited strategies, or pay attention to the fear-mongering in the financial media. You'd be much better advised to understand the underlying basis for how prices are set, and the risk inherent in assuming these prices are not "fair."

That's the real risk of betting against the dollar.

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11 Comments

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londonmum9

The one who gets hurt the most in this falling dollar environment is the U.S. consumer. What will QE II do for the 14.8mm Americans out of a job? Who is prospering from new investment vehicles? With the now rumored etf of copper and aluminum how will any low to middle income person afford a new home while these new products keep rolling out benfitting who? How will this encourage construction job hiring?

October 09 2010 at 12:21 PM Report abuse rate up rate down Reply
monseigneurdev

Buy Toilet Paper in bulk and rent some storage space.

October 04 2010 at 11:54 PM Report abuse rate up rate down Reply
scottee

the only way to protect your investment dollars is to AUDIT THE FED AND THEN END THE FED...SIMPLE!

October 04 2010 at 8:29 AM Report abuse +2 rate up rate down Reply
plleo

I have been in the Private Sector my whole Life....and my business was Strangle to Death by the Public sector rules and tons of B.S. regulation...It did take them about thirty years to Strangle my business to Death...I dont think they thought about the part that..When the Private Sector is Done...That they are Finished to...A parasite works in the same manner...

October 04 2010 at 1:33 AM Report abuse +2 rate up rate down Reply
plleo

Give all your money to your really smart goverment...They are here to help....

October 04 2010 at 1:26 AM Report abuse +1 rate up rate down Reply
1 reply to plleo's comment
scottee

We, the people, have to vote out every career politician, every election, every time, starting this November to put the fear in them to make the hard decisions and do what's right. they earn six figures with full benefits while wrecking the economy and legislating everything for us while exempting themselves...why? and they earn a pension by only serving a little while...and not at age 65....why? and they don't pay into social security or buy their own IRAs...why???

October 04 2010 at 8:31 AM Report abuse +1 rate up rate down Reply
muenft

Things will get better when the elections indicate we are going to have CHANGE in leadership. One that is not hostil to business. Remember he said "now is not the time to make a profit" Well what do they think we are going to pay our rising taxes with? "Words..just words If they will accept words as payment can i pay that electronically?

October 03 2010 at 11:57 PM Report abuse +2 rate up rate down Reply
martinsportraits

The dollar is finished , you would have to be crazy or stupid to believe otherwise , I wish I would have went heavy into precious metals years ago , expect gold and silver to go through the stratosphere in the coming years...and watch the fed keep on printing that green paper backed by a big fat zero while China takes every manufacturing job you can think of ......we asked for it!

October 03 2010 at 8:20 PM Report abuse +5 rate up rate down Reply
JESUS F ALFONSO

If you get rid of all the socialists in Washington and replace them with ones that implement new laws for U.S. production, oil drilling and over all common sense the U.S. DOLLAR, WILL NOT CRASH.

October 03 2010 at 12:13 PM Report abuse +6 rate up rate down Reply
1 reply to JESUS F ALFONSO's comment
scottee

we need TEA (taxed enough already) party candidates!

October 04 2010 at 8:37 AM Report abuse rate up rate down Reply
jackshelt

I would be inclined to agree with Mr. Solin, except I noted that the markets mispriced the financial impact of the housing crisis by a quantum percentage. We had a crisis not because of a lack of information, but because the information was not interpreted correctly. His reasoning is so badly flawed that I consider this article a waste of carbon based energy.

October 03 2010 at 12:11 PM Report abuse +2 rate up rate down Reply