Two Ways To Hedge The Falling Dollar

By Kyle Bumpus

With the dollar getting weaker every day, prudent investors need to take action to hedge their exposure to the ailing greenback. I'm not suggesting you dump all your stocks and buy gold and wheat futures, but the trend is too strong to ignore. Here are two simple ways to hedge your bets.

Invest In Foreign Stock Mutual Funds

Probably the easiest way to hedge against the falling dollar is to invest in foreign stock mutual funds. Most foreign stock funds are unhedged, meaning they own stocks directly on foreign exchanges denominated in foreign currencies. If the dollar falls relative to those other currencies, you gain even if the underlying stocks themselves don't budge.

Just as I recommend index funds for your US stock exposure, I also highly recommend them for your international stock allocation. Like their domestic counterparts, foreign stock index funds offer rock-bottom expenses, tax efficiency, and higher over-all returns than their actively-managed brethren. You should consider investing anywhere from 25% to 50% of your over-all stock allocation to foreign stocks to hedge your dollar exposure as well as achieve the more obvious diversification benefits.

Lend Money To Foreign Governments

Those of you who want foreign currency exposure without taking on the additional risk inherent with all equity invests should consider investing in foreign government bond funds. Developed market governments such as Australia, Japan, or the UK are excellent credit risks and often offer attractive rates on government issues in their respective currencies. If the dollar declines, you get both the promised interest payments and a currency boost. If the dollar rallies, you still get the interest payment to soften the blow. Many foreign bond funds hedge their currency exposure so it's important to find an unhedged fund if currency diversification is your goal. When in doubt, check the prospectus. One reasonably-priced unhedged foreign bond fund I recommend is the T Rowe Price International Bond Fund (RPIBX). You might consider investing anywhere from 10% to 30% of your bond allocation to foreign bonds to achieve adequate diversification.

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Published at Apr, 10 '08 ; read 153 times;

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