I don’t like to lose money.
Losing money hurts because finding money in the first place usually means you have to work for it. Think of all those early morning starts and traffic jams on the way into the office.
Losing money is right at the bottom my list of things I don’t like along with pets dying, sleeping in airports and root canal work. (I’ve had two root canals. Both times I was convinced the anesthetic wasn’t working.)
The problem is losing money is a lot easier than making it. It tends to come naturally to us. Which is why we pay annual membership fees to gyms in January only to stop going in February. And why they serve free drinks all night at casinos.
One of the easiest ways to lose money is to forget to diversify your assets.
An example of not diversifying your assets is to have all your money in stocks. Another is keeping all your savings in one currency. Which is what I want to discuss today.
As an International Living reader, you tend to have a global perspective on the world. But how does that translate to your 401(k) or your brokerage account? Is it as diversified as it should be?
Here’s a chart of the U.S. Dollar Index going back to June last year—three months before Fed chief Ben Bernanke announced that he was going to flood the system with $600 billion freshly digitized dollars by way of his QE2 program.
What you’re looking at is a steady decline in the exchange value of the dollar versus a basket of six other major world currencies.
I’ve shown you this kind of chart before. It’s particularly bad news if you earn and save in dollars but live in another country that has a different currency to the dollar. Because it means your buying power is falling versus other currencies.
Put simply, if all your savings are denominated in U.S. dollars you are NOT well diversified. The steady decline in the dollar has already made you poorer in global terms. And any sudden drop in the future could leave you in a very bad place indeed.
Luckily, diversifying your savings out of the dollar is easy.
Let me show you another chart. This time of the U.S. Dollar Index plotted against gold, and ETFs that track the Canadian dollar and the Swiss franc.
There are lots of squiggly lines on this chart. But the three important ones here are the orange line (which represents gold) and the green line (which represents the Canadian dollar) and purple line (which represents the Swiss franc).
I’ve recommended to readers in past issues that they add gold, the Canadian dollar and the Swiss franc to their portfolio.
As you can see from the chart, these three currencies (and, yes, I include gold as a currency) are the best “anti dollars” in town. They tend to go up as the dollar goes down. And vice versa.
You can easily buy these by way of exchange-traded funds (ETFs) through your online broker. My favorite way of doing this is by way of the ETFs Physical Swiss Gold Trust (NYSE:SGOL), the CurrencyShares Canadian Dollar Trust (NYSE:FXC) and the CurrencyShares Swiss Franc Trust (NYSE:FXF).
These are highly liquid, meaning you can buy and sell them at anytime. And they will immediately diversify your savings away from the U.S. dollar.
I don’t believe all the “death of the dollar” stuff doing the rounds at the moment. The dollar will be around for a long time. But it’s clearly sick right now. And it is clearly underperforming some of its major rivals.
As an international investor, you should always be wary of having all your eggs in the one currency basket. If you haven’t already, consider buying some “anti dollar” protection for your portfolio.