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| Portfolio Considerations for Currency Investing |
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| Written by Rob Viglione |
| Wednesday, 13 August 2008 01:51 |
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Diversification is the best way to reduce portfolio risk. It has long been understood that spreading your capital wisely can save you from unexpected asset deterioration, but exactly how to do that needs to be reconsidered. An industry has been built around smooth talking salesmen advising people to diversify their portfolios into a variety of stock and bond products. These well-dressed businessmen extol the benefits of such and such value or growth stock fund. They sound sophisticated when they tell you that small caps are countercyclical to large caps, and so forth. The reality is that stocks are stocks and regardless of how you splice up and segment them into categories, they hold inherently similar correlations. With the emergence of exchange-traded funds (ETF's) there has sprung forth tremendous new tools for diversifying individual portfolios. Stocks and bonds can now be supplemented by precious metals, natural gas, oil, agricultural commodities, real estate, sub sectors of the economy (retail, financials, energy, etc.), targeted global markets, and currencies. Currencies, in particular, offer individuals a powerful alternative for hedging inflation and the decline of the US dollar, and adding a new level of diversification to offset adverse movements in stocks and bonds. Negatively correlated assets held in the same portfolio reduce overall risk. Risk, as measured by variance of returns, can actually be lowered simply by holding assets that do not move in the same direction. For instance, if stock A decreases 70% of the time stock B increases, and vice versus, then you could construct a portfolio that has less total risk than either A or B by including both. Analyzing stock indexes in relation to major world currencies shows that Swiss Franc, Japanese Yen, and Swedish Krona have negative correlations to US stocks, while Mexican Peso, Australian Dollar, and Canadian Dollar are positively correlated. To get the most out of diversifying a US stock portfolio, it would be advantageous to include the former and exclude the latter. However, there are other reasons to invest in currencies, such as hedging declines in the US dollar. Including the negatively correlated currencies over the last year would have seen between 12% and 17% capital gains. This is due merely to appreciation relative to the US dollar. In addition to relative currency gains, each ETF offers dividends representative of each countries interest rates. For investors concerned with income, they should consider holding the highest yielding ETF's: Australian dollar, Mexican peso, and British pound. Currency ETF's offer a great alternative to traditional methods of diversification and are great to offset further declines in our own currency. Consider that commodities price growth is largely attributable to US dollar depreciation and you can see how foreign currencies can insulate individuals from energy, food, and other commodity-driven inflation. About the Author: Rob Viglione is an writer, investment manager, and runs a real estate brokerage. He writes about political and economic freedom on The Freedom Factory. Kindly provided by LJ-Marketing.dk You are welcome to use this article on your own website, if you include the link just before this text. |
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