One alternative type of investment to stocks, bonds and international securities is investing in currencies of other countries. The cheapest and easiest method is through Currency ETF's provided by Barclays, Powershares, Rydex and Wisdom Tree as examples. Should you?
Institutional investors use these tools for short-term, strategic and/or tactical purposes but not so much for long-term "buy-and-hold" investing.
One reason to invest in foreign currencies is that they are not correlated with your other financial assets (so they may go up or down regardless of whether the Dow Jones is going up or down).
But...here is an argument against:
...if you already have investments in large U.S. companies that obtain 50% of their revenues from overseas and you also have investments in international stock and bond funds, then you have exposure to foreign currencies already.
If you have decided to invest 5%, for example, directly in foreign currency investments and experience a positive change in that fund, this may be more than offset by your other international holdings going negative.
Yes, this is what negative, low or no correlation does for your overall portfolio but it may make little sense unless you calculate how much of a percentage in foreign currencies is needed to truly offset your international positions.
Here is a better argument for avoiding foreign currency investments (from Financial Advisor magazine, February 2010 issue article "Taming the Currency Elephant" by Marla Brill):
"...simply that over long periods, currency moves tend to even out. Since it has been argued that long-term expected returns are essentially zero, a currency overlay for long-term holdings [buy-and-hold investors] would seem to make little sense..." I agree.
I am not alone, "...at the beginning of December, currency ETFs held some $6.3 billion in assets..." compared to an "...average daily turnover of $3.2 trillion...", so you can see that "...the daily currency turnover is more than ten times that of all of the world's equity markets combined..." The activity is high but the ETF participants are pretty insignificant (of-course there are other ways to participate). Just keep perspective, as I often say/write.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.