Aging well with foreign currency
TERRY SAVAGE email@example.com Jul 23, 2007
Updated: May 3, 2013 12:14PM
The recent decline in the dollar hasn't been felt by most Americans because the rest of the world's nations -- especially Asia -- have either cut prices or tied their currency to the value of the dollar. That means the stuff we import from them hasn't risen in price. But if you travel to Europe, you'll get a real shock at how little the dollar buys these days.
What about in the future? We worry about having "enough" dollars to retire, but what will those hard-earned dollars be worth in the years ahead? It's enough of a concern that you might want to take a small portion of your funds and hedge your bets, even though the Fed says it has inflation under control
Even at a 3 percent annual inflation rate, the spending power of your money will be cut in half in just 24 years! Which means that you'll need twice as much money in your last year of retirement as in your first in order to maintain your lifestyle. Now that's a daunting thought.
It's enough to make you consider at least some form of hedge against the possibility that the dollar will be devalued by excess money creation in future years. Gold is the traditional hedge, but these days it has become easier for investors to diversify into other currencies.
Speculators trade foreign currency futures. But there are other investment alternatives for more conservative, long term investors.
FOREIGN CURRENCY BANK CDS. You don't have to open an account in a foreign bank to switch your dollars into euros or British pounds sterling or yen. Everbank.com offers a variety of FDIC-insured certificates of deposit -- denominated in various individual foreign currencies or "baskets" of currencies.
The interest you earn is equivalent to what you'd earn in a foreign bank. When the CD matures, and you convert back into dollars, you'll either get more dollars if the foreign currency is stronger, or fewer dollars if the currency has weakened.
Minimum investment is $10,000. You can get more information at www.Everbank.com
FOREIGN CURRENCY ETFS. This is a relatively new form of exchange-traded fund, a listed security whose value is based on the assets inside the fund. In this case, the assets are foreign currencies -- either a one-currency ETF such as British pound, euro or any of several others. Owning these shares, which are traded on the NYSE or Amex, is like owning the currency within a foreign money market account.
For more information go to www.Morningstar.com, click on ETFs, and then look for the "ETF Screener tool." You'll find them listed in the "bond fund" group, and then the "world bond" category.
CURRENCY MUTUAL FUNDS. There is one mutual fund that specializes in investing directly in "hard" currencies -- the Merk Hard Currency Fund. This no-load fund was started in May 2005, and now has assets of more than $110 million. It is designed to give investors diversification across a selection of foreign currencies, selected by the manager, and changed only gradually. That makes this fund suitable for the longer-term investor, who wants the professional management and a diversified exposure.
Currently the fund has about 43 percent of its assets in the euro, another 16.5 percent in the Canadian dollar, about 10 percent in the Swiss franc and smaller amounts in Swedish, Norwegian, British, Australian and New Zealand currencies, as well as 8 percent in gold. Minimum investment is $2,500, and you can download the prospectus and application at www.MerkFund.com -- or purchase through the Fidelity or Schwab fund networks.
Next time you pull a dollar out of your wallet, take a closer look. Yes, you'll need lots of them when you retire. And hopefully those dollars will be worth enough to pay for your retirement. It's a bet you might want to hedge in some small way. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.