World View

As the dollar declines, set your sights on diversification.
Magazine Contributor
3 min read

This story appears in the January 2008 issue of . Subscribe »

If you have a well-rounded investment portfolio, it won't be filled only with U.S. securities. You know this, right? Well, now is a good time to remind yourself, since the U.S. dollar is at its weakest point in a generation.

A punier greenback is a good thing for nondollar-denominated investments. Let's say, for the sake of simplicity, that you earned 10,000 reals in profit from your Brazil-focused, exchange-traded fund. If the dollar-to-real exchange rate is 2-to-1, then your earnings are worth $5,000. But if the exchange rate drops to 1.8-to-1, then converting your profits will yield $5,556--same investment, same return, more U.S. dollars in your pocket and happy days.

No financial planner worth his or her salt would suggest a top-to-bottom portfolio makeover based on currency fluctuations alone. But it may be time to tweak around the edges to reflect the new global reality. For starters, consider at least a couple of international stock and bond funds that don't hedge against currency movements. The base components of any portfolio should be low-cost index funds, which bring up options such as the Vanguard Total International Stock fund and its delectable 0.32 percent expense ratio. On the bond side of the ledger, there aren't any options quite so obvious--or cheap. But funds such as American Funds Capital World Bond will bring some measure of currency diversification for the fixed-income portfolio.

Significant moves into commodities and currency trading, another way to play the weak dollar, are generally best left to professional speculators--both tend to be volatile. But there are plenty of gold and silver funds, if you're so inclined. And if you have a little mad money, a relatively new breed of ETF will help you hedge against currency moves. Rydex Investments offers probably the best known ETFs at the moment, with options ranging from the Mexican peso to the Swiss franc to the Australian dollar.

And about that Brazilian ETF: In addition to, or instead of, broad international exposure, focused regional investments can make sense if you have enough to spread around. There's been a lot of talk in recent years, for example, about BRIC (Brazil, Russia, India, China) investing. Given some of the returns these markets have already produced, a slightly broader basket might be a safer bet; consider individual ETFs or funds focused on, say, Latin America, Asia and Europe.

Diversification is always a good idea. The recent currency trends just provide some nice icing on the investment cake.

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