Investing Against US Dollar

First of all, make sure you understand the title correctly. Investing against $US is in no way investing against US, nor is it unpatriotic. As I have talked many times in my blog, I expect a higher than normal inflation rate going forward compared to recent history and compared to other countries, most likely this will translate into a higher depreciation rate versus other currency, and rising prices of commodities. Warren Buffett has betted billions of dollars against $US in the foreign exchange market in his company Bershire Hathaway because he also believed that $US is vulnerable to depreciation due to heavy government debt overhang. Same for George Soros, and Bill Gates (Actually, some of their timing was not that ideal. I think they got screwed by all the central banks).

You could put some of your money in foreign currency, especially in a foreign country that you either travel to more frequently for personal or business reason. I don’t advise anyone to put too much cash in foreign currency in general. The reasons are that the amount of cash that you put in foreign currency will add to the amount of your idle non-investing cash. This amount of cash is also quite less usable to you since it is in foreign currency until you travel to the same foreign country. And unless you divert a significant amount of your asset to foreign cash, your overall portfolio cannot be protected against $US depreciation.

Despite all these, if you want to invest in foreign cash, you can do so very easily at This is one of the best international banking site that I’ve seen. Not only they offer certificate of deposit in foreign currency, but they also offer CD tied to a basket of commodity currencies (such as Australian/Canadian/South African dollars). The foreign exchange charge by them is a little expensive for my taste at 1.5%. It means that the moment you exchange your $US to foreign currency, you are already out of 1.5%. So unless you intend to leave those money in that currency for a very long term, and/or use them when you travel, it serves you no good to exchange your money just for a couple of years.

If you have an allocation for bond investment, I advise highly to allocate some money to foreign intermediate term bonds within your bond allocation. There is no easy way to tell how much you should allocate for each currency. Some of the currency that I like better for the long term are Euro, Japanese Yen, Chinese Renminbi, Canadian, Australian, and New Zealand dollars. My criteria for choosing a particular currency are a strong, expanding economy, and/or economy more based on production of commodity. European countries don’t grow that fast, but I would put some dollars in that economy since it (and maybe Yen) would probably be the first primary choice when $US falters.

If your portfolio is small, and cannot invest in individual bonds, I would suggest buying some un-hedged international bond fund, preferably having no US component in it. I found and invested in a low-fee bond like that BEGBX, but its returns are (and were) not great. The primary reasons are obviously that $US has been going quite strong against foreign currency these past 1 to 2 years, and that bonds in foreign currency usually pay less interest than US, especially Japanese bonds which has its interest rate at almost 0%. For that reason alone, I probably would not put too much money into Yen if at all. So please do set your expectation lower when you invest in foreign bonds, and understand your reasons for investing in them. You’re taking a position, not for a quick short term gain.

You can either buy diversified global stock funds or country-specific mutual funds or ETFs (such as EWJ for Japan, EWY for Korea, EWT for Taiwan, IFN for India, EWC for Canada, EWA for Australia, etc.) Diversifying in foreign countries may also help reducing your portfolio volatility, according to Modern Portfolio Theory (MPT). Personally, I would recommend buying ETF/mutual fund from Vanguard, and possibly fine-tune your allocation by adding EWJ, EWY, IFN, and maybe EWA/EWC (both of which are more tied to commodity markets if you are interested). How much you should allocate for each depends on your personal preference? In the long term however, this percentage may be the determining factor of how well your portfolio performs.

By commodity, I don’t mean physical commodity, but rather any investments that are related to commodity price. More specifically, they are natural resources and/or precious metals. I have two focused posts on how to invest in those two sectors. Please simply click on the hyperlinks. Assuming $US depreciates, investing in these two sectors will help retaining the purchasing power of your US dollars. The biggest advantage of investing in commodity-related investments is that it is the more direct way of maintaining your purchasing power (if deflation sets in, your money in this sector will shrink since the current price of commodity is less compared to the time you invested). However, commodity sector is the most volatile sectors of all. If you cannot take an annual swing of some 40+ %, you should control the volatility by sizing this portion to a small percentage until you can accept its overall volatility effect on your portfolio.

Since most of the people (if living in the US) will have the majority of assets in the US and/or dominated in $US, it simply makes good investing sense to have your asset diversified in different countries if not in different currency. Most financial advisors will advise you to at least have 10% to 20% stock/mutual fund holding in foreign stocks. Historically, such diversification reduces your overall portfolio volatility. For the following classes of assets: foreign cash, foreign bond, foreign stocks, and commodity-related investment, I recommend foreign stocks as the safer and better long term way to invest against $US for smaller investors. If your portfolio size is sufficiently large > $500K, I suggest to consider foreign bonds as part of your existing bond portfolio.

If one’s portfolio is big enough (>$300K), and has the tolerance for extreme volatility, one can put some 5% to 20% into commodity-related investments in natural resources and precious metal investments. At times, this may be the only saving grace for your portfolio when both domestic and foreign stocks are down. More and more, due to globalization of world economy, this is increasingly true. Stock markets around the world are quite synchronized. Investing just in foreign stocks most likely will not save you a heart attack in the short term (when all stocks fall) but only giving you a long term advantage.

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