Its the Dollar Falling, Not the Sky: Investors Who Play it Smart Can Come Out Ahead Financially
The dollar is falling. Should you be alarmed? Avoid unpleasant surprises and position yourself for financial success by understanding five key points.
(PRWEB) February 28, 2005 -- You may be wondering how the weak dollar will affect your investment portfolio and what, if anything, you should do about it. One thing you should not do is panic. Before doing anything drastic, it's important to understand what all this talk of a "falling dollar" actually means.
What Does "Falling Dollar" Mean?
The falling dollar refers to the fact that the exchange value of the American dollar has been declining sharply against several major world currencies over the last couple of years. It is important to recognize that the U.S. dollar is still the de facto standard currency worldwide. The U.S. is the world's richest and most economically stable country, and that wealth is what gives people confidence in the dollar. It's not very likely that the U.S. will suffer through an economic crisis such as those that caused the devaluation of the Argentine peso or the Thai baht in the past decade.
Recently, though, confidence in the dollar has been eroding. The ballooning budget deficit is one factor, and another is the growing current-account deficit, which means that the U.S. is importing more than it is exporting. Therefore, the risk of further dollar declines is very real and should not be ignored.
The impact of this decline produces both good and bad trade-offs for American consumers, depending on their investing and spending habits. Here are the major impacts, and what changes you might make in your finances to minimize or take advantage of the impacts.
More Expensive Consumer Goods - Many consumer goods Americans buy, from cars to electronics to apparel, are imported. The prices of those products inevitably rise as the value of the U.S. dollar declines. The obvious counter strategy, of course, is to buy American.
Travel Costs More - Its a fact that hotels, meals and tourist sights are going to cost more for American travelers to Europe, Japan Canada and Australia, among other nations, because their dollars wont buy as much of the local currency as they did before. You can either delay travel until the dollar strengthens, or "buy American" by traveling in the United States. In addition, it should be noted that the dollar is not falling everywhere. The dollar has actually risen against the currencies of Mexico and several Latin American nations, making them cheaper travel destinations; therefore, you may want to head south.
Investing Strategies Might Vary - While you may not want to travel overseas soon because of the cost, you may want to send your money there. The main effect of a weaker dollar is that investments denominated in other currencies become more valuable relative to dollar-denominated investments, all else being equal. As a result, many people see funds that invest in foreign securities - stocks, bonds, or some combination thereof - as a way to play the weakening dollar. Such exposure to foreign securities must be un-hedged for this strategy to work, since hedging negates currency effects in a portfolio. A weak American dollar is also good for American companies that generate substantial revenues abroad. Multi-national companies that do big business overseas may do well in a declining dollar environment.
Interest Rates on the Rise - Further declines in the dollar can also affect interest rates because we depend on foreign purchases of our treasury bonds. If the dollars continues sinking, interest will have to increase to keep attracting that foreign money. Greenspan warned of this in a recent speech. Smart consumers will avoid ARMS and other variable rate loans that could present them with a nasty surprise. Watching your credit card debt and other revolving lines of credit is essential.
Currency Bets are a Gamble - Bear in mind that a lot of pessimism about the dollar is already priced into exchange rates, and the easy money has probably already been made. A currency bet now implies that you think the dollar will weaken further. That's far from a sure bet, since currency movements regularly confound the expectations of the so-called experts. As with any investment decision, you should be wary of "chasing performance." Ultimately, most investors should look long term. For one thing, currency fluctuations generally even out over time. Second, the primary benefits of devoting a portion of your portfolio to overseas investments (perhaps 10 to 20 percent) is not to ride the winds of currency fluctuations but to diversify and actually reduce overall investment risk, and to buy into good companies abroad.
Your investment strategy should be based on your particular circumstances and should be mapped to your unique goals and dreams. A properly diversified portfolio based on a strategic investment plan can produce the results you need with less volatility than market bets and investment speculation are likely to produce.
About Puckett Retirement Advisors, LLC
Brian Puckett and his team provide comprehensive wealth management services to individuals, families, trusts, corporations and non-profit organizations. Investment management services include custom designed investment policies and ongoing portfolio management, with periodic reviews to ensure the integrity of assets within the portfolio. The firm also offers retirement planning, estate planning, risk management and business retirement plans. Securities are offered through Cambridge Investment Research, Inc., a Registered Broker/Dealer (member NASD and SIPC). Phone 405-607-4820 or email info@puckettadvisors.com. Find additional information and market commentaries on www.puckettadvisors.com.
Contact:
Brian Puckett, JD, CPA/PFS
President, Puckett Retirement Advisors, LLC
9400 North Broadway Extension, Suite 540
Oklahoma City, OK 73114
Phone: 405-607-4820
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