Talk about Money: Protect your portfolio from a falling dollar

A recurring theme over the past several months has snagged more than a few headlines:
The U.S. dollar is being devalued.
This historic, nearly uninterrupted slide started in the middle of 2001 and has continued for eight years. After a brief respite during the beginning of the financial meltdown a year ago — when foreign governments and other investors perceived the U.S. dollar as a safe parking spot for savings — it has continued on its march down.
Perpetual deficit spending, a ballooning national debt and an easing, loose monetary policy by the Federal Reserve — which more concerned at the moment with deflation than inflation — have all led to a weakened greenback.
So, what does that mean for you and me in Scotts Valley or the San Lorenzo Valley?
A cheap dollar isn’t entirely bad. It makes our goods and services more competitive in the rest of the world and will add more balance to our huge trade deficits. It will also allow our government to repay its massive debt with cheaper dollars.
During this process, however, pain is certain to be felt by all. Our purchasing power will decline, we won’t be able to buy as many things as we once could, and, in most instances, our standard of living will diminish.
Although it’s dangerous to write the dollar’s obituary so soon, there are some defensive steps you can take now to help preserve your retirement accounts, investment portfolios, and overall net worth from the effects of a weakening dollar.
• Consider tangible assets, such as real estate, agricultural commodities, food and resources, including oil and water. Many foreign governments are actively exchanging the dollars they hold. “Things” tend to hold their value better than a depreciating currency. In fact, many such things have a direct correlation with the dollar, so as it weakens, the price of hard assets could increase.
• Look for large, multinational U.S. corporations that generate a significant portion of their revenues from overseas. These types of companies have the added benefit of converting foreign profits into U.S. dollars. If the dollar falls, revenues in local currencies are converted into more dollars, thereby “goosing” earnings. We believe stock prices and earnings tend to follow each other.
• Consider international investment vehicles that are “un-hedged.” Many vehicles hedge against fluctuations in currencies, viewing currency risk as unnecessary. That means all the income received from foreign sources is pegged to the U.S. dollar. A rising or falling dollar has no effect on the income. However, there are some investment vehicles that are un-hedged, meaning they don’t peg their income to the greenback. Therefore, as the dollar weakens, the income received from foreign sources increases in value. This inverse correlation to the U.S. dollar has the net effect of increasing the level of income in real terms as the dollar falls.
• Many view gold as a store of value when currencies destabilize, as it appears is happening now. It’s more than coincidence that gold has enjoyed a sustained bull market rally as the dollar has fallen the past eight years. Foreign governments have diversified away from the dollar into gold, and investor interest in the yellow metal has also surged. One word of caution: This rediscovered interest has caused gold to reach historic highs, so proceed slowly and choose your investment vehicle carefully.
Of course, having a balanced approach to your investments that considers your individualized risk tolerance, time horizons and short- and long-term income needs is probably the best strategy in any market environment. But being attuned to some overarching themes and market forces can help you strategically make adjustments to your overall investment approach and can potentially lead to better profitability — or at least a better defense.
As they say, the best offense sometimes is a good defense. When it comes to investing these days, that statement may never have rung truer.
• Orion Melehan is a certified financial planner for LMC Financial Services in Scotts Valley. Contact him at [email protected].
Securities and investment advisory services offered through SagePoint Financial Inc. member FINRA/SIPC a registered investment advisor. LMC Financial Services is not affiliated with SagePoint Financial Inc. or registered as a broker/dealer.