Diversification is Imperative

From January 2005 to January 2006, the U.S. dollar (USD) gained against both the Yen and Euro. Some were optimistic that the trend would continue, but we here at Profit Confidential were not convinced about the strength of the USD. Since the start of this year, the USD has been downtrending against both the Yen and Euro.

 In my view, I believe the USD will continue to face selling pressure. This is something you should keep in mind when trading or investing.

 The outlook for the USD is made worse due to the country’s massive debt that currently sits at $8.41 trillion or $28,109 per U.S. citizen.

 The massive cost to fund the post-war effort in Iraq appears to be getting out of hand as the country remains a base for conflict that requires the U.S. military to stay. And this is expensive.

Advertisement

 Pundits argue that extending tax cuts will push the deficit to over $1 trillion from 2012 to 2016.

 The rising budget deficit could inevitably lead to a weaker USD as the demand for US-denominated assets declines. For investors, this means holding U.S. stocks may produce added risk should the USD begin to falter going forward.

 The key is to minimize the risk. You could do this by holding some foreign investable assets. For example, those of you holding investments in Canadian stocks have benefited. The main TSX index in Canada continues to outperform U.S. markets due to strength in energy and gold stocks, a key component of the TSX.

 In addition, the Canadian dollar has done well against the USD since January 2003. In the last two years, the Canadian dollar has steady climbed from USD$0.65 to the current USD$0.88. By holding Canadian assets, you would have made a nice profit from the rising Canadian dollar.

 Geographically, you could also invest in such places as Japan, India and South Korea, all of which have had some strong market gains over the last few years. In these countries, I would look at stock mutual funds or Exchange Traded Funds (ETF) as a safer strategy than buying individual stocks or ADRs.

 Another way of hedging against a decline in the USD is to buy foreign bonds denominated in other currencies. Canada is an ideal place for good quality bonds.

 So, however you do it, diversification is an important strategy for your portfolio. If the USD begins to trend lower, you need to be have some assets denominated in other currencies.