Currency: The Hidden Portfolio Risk
In today's investment landscape, risk can come in all shapes and sizes. When structuring a stock portfolio most investors try to gauge the risk in buying particular stocks. Savvier investors also factor in sector risk, business cycle risk, and recession risk. Cautious investors may try to mitigate these risks by favoring bonds over stocks. But even then they must contend with default risk, interest rate risk, and in the case of sovereign debt, political risk.
However, with central bank monetary policy now an increasing driver of economic outcomes around the world, there is one risk factor that deserves more attention: currency risk. No investment, whether it be in stocks, bonds, real estate, or lemonade stands, can hold up well if the currency in which it is valued takes a tumble. It always surprises me that most US investors still fail to take currency into account, and in particular their potentially overweight exposure to the US dollar.
Many market watchers have justifiably concluded that the spiraling debt crisis that is now underway could develop into a major currency crisis that starkly alters exchange rates. Rather than rising above the fray, the US dollar could be in the center of the storm - especially if its valuable reserve currency status becomes threatened. The dollar, which many now regard as the ultimate "safe haven," may prove to be a trap for those investors who lack adequate currency diversification.
In the spirit of sharing our favorite dollar-alternatives, I recently sat down with Axel Merk, founder and president of Merk Investments, who is a well-known authority in the international currency arena today. That conversation resulted in a new report, entitled Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years, which is now available for free public download at www.newcurrencyreport.com.
Since the fiat currency game is in the hands of governments, many of our most interesting disagreements stem from the different odds Axel and I place on government reform. Have the Swedes had enough of the welfare state? Will Hong Kong switch from a US dollar peg to a yuan peg - or will the Hong Kong dollar one day float on its own? Are left-wing parties more likely to pass punitive taxes in Australia or New Zealand, and if so, how will those issues affect their economies? No one knows for sure how these events will play out, but as investors, we have to act on the data as we see it - and sometimes even like-minds see it differently.
Go to www.newcurrencyreport.com to download the report for free. It is fun reading, but it also contains our latest thinking on the currencies we consider worth exploring. In a world where gold is in the quadruple-digits and the S&P has downgraded US debt, we both feel it's high time every American consider diversifying his or her portfolio to mitigate currency risk. We hope this discussion gets your gears turning.
to buy Peter Schiff's best-selling, latest book, "How
an Economy Grows and Why It Crashes." For a look back at how Peter
Schiff predicted the current crisis, read his 2007 bestseller
"Crash Proof: How to Profit from the Coming Economic
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange