It might be time to invest in non-U.S. currencies

The Insider

Your Money

February 27, 2005|By BILL BARNHART

The worst day in the stock market in nearly seven months had very little to do with stocks.

Tuesday's 174-point drop in the Dow Jones industrial average, according to most accounts, was sparked by an overblown report out of South Korea hinting that Seoul's appetite for U.S. dollars had declined.

A hairline crack in the dike of the almighty dollar prompted Wall Street to shoot first and ask questions later. It was a wake-up call to ordinary investors.

Most investors only recently have realized the advantage of holding fixed-income securities to diversify a stock portfolio. Now, the question is whether investors need to diversify into non-U.S. currencies.

There are two reasons to remain indifferent to the ebb and flow of foreign exchange rates.

Currency trends move in unpredictable ways. Dollar-bashing is in vogue these days. But no one can consistently forecast currency relationships, even in the short run. So why bother?

Worrying about currency risk merely adds costs to your investment program that can't be recovered. That's because currencies, like commodities and unlike stocks and bonds, produce no cash flow.

The reasons to diversify currencies are compelling:

The purpose of investing is to protect and build purchasing power. Like inflation, a persistently weaker dollar erodes your purchasing power when you buy imported goods.

Currency volatility is beloved by short-term traders, including hedge funds. Exaggerated currency swings, coming at the wrong moment, can unnerve ordinary investors and overwhelm conventional investment strategies.

Ralph M. Segall of the investment advisory firm Segall Bryant & Hamill said his clients are hardly speculators.

But "currencies are something you want to think about as a hedge for your portfolio in case the dollar really collapses," he said.

"If your investment program is shopping for the highest CD rate, you're sunk, because if your global purchasing power is declining your costs are going up," said Jack Ablin, chief investment officer at Harris Private Bank.

Holding currencies directly is costly and risky. The trick is to switch a portion of your stock and bond portfolio into U.S.-based investments that mimic foreign currencies.

Segall put clients in high-rated debt securities issued by mortgage finance agency Fannie Mae that pay principal and interest in yen. Similar instruments pay in euros and Canadian dollars.

International bond mutual funds that don't hedge their non-dollar holdings provide currency diversification. Look for low-cost funds sponsored by high-rated U.S. fund companies.

Ablin said an equity portfolio can be diversified by constructing proxies for a basket of foreign currencies.

For a U.S. investor, about 80 percent of the return of a basket of non-U.S. stocks from major countries is explained by the movement of the underlying currency, he said.

Similarly, a commodity fund, available from such firms as Oppenheimer and PIMCO, mimics currency trends.

Adding currencies to your investment concerns is a major decision. It might be time to take that step, but go slow.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at

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