Decline of the Dollar Spurs Diversification

What do supermodel Gisele Bündchen and the Organization of the Petroleum Exporting Countries (OPEC) have in common? Both announced a desire to begin dealing in currencies other than …

What do supermodel Gisele Bündchen and the Organization of the Petroleum Exporting Countries (OPEC) have in common? Both announced a desire to begin dealing in currencies other than the U.S. dollar in November. They’ve joined a growing number of people, organizations and countries that have decided the dollar is—as Iranian President Mahmoud Ahmadinejad said Nov. 18—just a “worthless piece of paper,” according to The Washington Post.

U.S. investors could learn something from the likes of Bündchen and OPEC, not to mention billionaire investors William Buffet and Bill Gross, and the People’s Republic of China—all of whom have decided to say “so long” to the greenback.

“This is a time to be fully diversified….The world agrees the dollar must fall further, with oil producers having all but abandoned the buck,” Craig R. Smith, CEO of Swiss America and author of Rediscovering Gold and Black Gold Stranglehold, said.

But getting out of the U.S. dollar may be easier said than done, particularly for those uncertain of how to approach it. There are many options out there, and it may be difficult to know just how much a portfolio ought to be diversified.

“A strictly statistical approach says that the relative weighting of one currency block…should reflect a nation’s or group of nations’ contribution to gross world product,” Richard Olsen, founder of Olsen Limited, a Zurich-based e-finance technology and service provider, and one of the founders of OANDA FX Trade, a retail foreign exchange dealer, said. “So, if the United States accounts for about 25 percent of GWP, dollar assets should make up no more than one fourth of the portfolio.”

One method of getting out of the U.S. dollar is investing in foreign currency on the foreign exchange, or forex, market. (For more information, see our article on the Forex Investment Market.) As the dollar falls, owning blocks of foreign currency can help protect investors from devaluation.

“The euro is the second most liquid currency, and offset currency to the dollar. Therefore most diversified investment portfolios own a piece of euros,” Chuck Butler, president of the EverBank World Markets, said. The dollar was trading at an average of 0.69 Euro in November, a significant drop from January’s average of 0.77 Euro, according to Exchange-Rates.org.

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Asian currencies are also recommended for investment. Asian currencies have intentionally been kept undervalued in order to encourage the exports that boost the countries’ economies, Butler said.

“Asian currencies and those economies with strong natural resources will outperform the U.S. economy because they have secular trends that work in their favor. As investors around the world begin to diversify out of dollars, they will necessarily apply buying pressure on attractive alternatives. And the resulting appreciation will generate additional buying pressure, driving up values,” Olsen said.

However, foreign currencies are not the only option available to investors looking to diversify out of the U.S. dollar. Smith said he recommends that investors have 5 to 15 percent of their portfolios made up of precious metals as a “foundation” before considering foreign currency.

“Precious metal prices have tripled since 2001 and may triple again over the next five to seven years because gold and silver represent an honest store of value,” Smith said. “Gold is fast becoming the global anti-dollar.” (See our articles on gold and silver for more information.)

There are programs to help investors convert some of their dollars into gold and other precious metals. (For more information, see our article on Investing in Gold and Silver CDs.) Americans can diversify their retirement portfolios with precious metals through the use of a self-directed IRA, for example, according to Smith.

“Investors can roll over a portion of their paper assets into precious metals without any tax penalties or new contributions by converting an existing IRA, 401(k) or other retirement fund into a precious metal IRA,” Smith said.

Investors can also shed their dollars by purchasing foreign real estate. Foreign real estate stocks have outperformed other asset classes in the past, averaging a 30.6 percent annualized total return (ATR) in the last three-year period as of April, compared with U.S. real estate, which had an ATR of 21.9 percent; U.S. stocks, which had an ATR of 8.5 percent; and international developed country stocks, which had an ATR of 17.1 percent, according to Fidelity Investor’s Weekly.

“European and Asian property markets are generally healthy. Their building booms are likely to outlast ours. That suggests that you should switch money invested in domestic real estate funds and export it,” according to Kiplinger.

However, investors should not overload themselves with foreign property investments. “Several academic studies have found that the performance of global real estate securities has more to do with how real estate is doing globally than with any differences between American and overseas stock markets,” according to Kiplinger.

Investors may also wish to note that, although the numbers siding with Bündchen and OPEC are growing, some do not feel the urgency to escape from the falling dollar.

Ken Fisher, CEO of Fisher Investments and a Forbes columnist, said it is not important to diversify into non-dollar assets. “Unless someone has special skills in forecasting currencies, which are exceptionally rare, the history of currency movements among western nations shows that the costs of hedging eat up all the benefits.”

But for concerned investors, there is still time to get out. Olsen said he believes the U.S. dollar has some time before it loses its position as the world’s dominant currency. Consequently, investors shouldn’t be too worried about missing the proverbial boat.

“At the beginning of the last century the British pound was the world’s preeminent currency; its demise required more than 50 years,” Olsen said. “We expect the dollar’s fall from leadership will happen a lot faster than that, but not in the next few years….We believe there is still plenty of time to start the diversification process: The U.S. dollar has a long way to go.”

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