Two Ways to Hedge the Falling U.S. Dollar
Posted on April 12, 2008 in the Money category
.As the Dollar gets weaker day-by-day smart investors need to do something in order to hedge their exposure to the falling US currency. You should not dump all of your stocks and buy up gold but the trend of the falling dollar is one that you should not ignore.
There are a couple of simple ways that you can hedge the falling Dollar.
* Make Investments in Foreign Stock Mutual Funds - This is probably the easiest way that you can hedge against the falling dollar. Many foreign stock funds are not hedged, which means that they are owned directly on foreign exchanges that are predominately dominated by currencies that are foreign. If the Dollar falls in relation to these foreign currencies then you will gain even if it is the case where underlying socks do not move. It is also recommended to index your funds for U.S. stock exposure, as well as indexing funds for stock allocation that is international. Much like domestic counterparts, foreign stock index funds give low expenses, tax efficiency, and a higher return. It is a good idea to look into investing anywhere from 25%-50% of the overall stock allocation you have into foreign stocks in order to hedge your exposure to the Dollar. By doing this you will also receive diversification benefits.
* Foreign Government Lending - For people that are looking for foreign currency exposure, but do not want to take the risk of equity investment there is investment in foreign government bond funds. Some governments that have developed markets, such as Japan, Australia, and the United Kingdom, are good credit risks and also offer very attractive government issued rates for their currencies. If the Dollar falls, you will receive both a boost in the currency you invest in and promised interest payments. If the Dollar happens to rise in value you will still receive interest payment to offset the loss. A lot of foreign bond funds hedge their currency exposure and because of this it is very important to look for a non-hedged fund if it is the case that currency diversification is what you are looking for. When you have any doubt you should check the prospectus. You may want to look into investing anywhere from 10%-30% of your bond allocation to foreign bonds in order to get decent diversification.
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