Hedging the dollar...........

[cardude]

I have a significant portion of my portfolio in fixed (45%), and much of that is CD's, and ALL of if it is dollar denominated. I was recently called crazy for having it set up this way, and I replied that I was not comfortable making a big currency bet (or able). The person who called me crazy said I actually WAS making a big currency bet having it all in dollars, and that may me go hmmmmmmmmmmmm.

Is anyone here hedging their fixed in a significant way, and if so, how?

 

[brewer12345]

The problem with currency hedging is that you have to decide what to hedge your native currency against, since currencies are all relative. I think a modest allocation to non-USD fixed income makes a reasonable diversifier (I like BEGBX for this, or GIM at a discount to NAV), but anything else and you are essentially getting into currency trading. Hope you have a cast iron stomach if you go down that path.

 

[FIREd]

I mostly do currency hedging on the equity side. I have a savings account in Europe, so I guess I do have some hedging on the fixed income side as well, though it is minor. I used to invest in international bonds but I didn't have the stomach for the volatility.

 

[braumeister]

I wouldn't call myself a hedger (not nearly sophisticated enough), but I think of my holding of FXF (Swiss francs) as kind of a hedge.
I don't think I'd buy it right now, but a couple of years ago when I did, I thought it was a good idea, and I've done fairly well with it. I think a lot of people are buying Swiss francs because they're nervous about the Euro and the US$, and little old Switzerland has always been a safe haven.

In the past, I've also done something similar with FXC (Canadian dollars), which was also a good idea since our northern friends weren't hit nearly as hard as we were in the recent recession.

 

[braumeister]

I should quickly add that I would never consider this sort of thing for more than a few percent of the portfolio!

 

[traineeinvestor]

Would it be correct in assuming that at least some of your remaining 55% is in equities? If so, you probably have at least some element of hedging given that the typical equity portfolio of a US based investor will include companies which (i) generate some of their revenues overseas and (ii) are commodity producers the price of whose products, while denominated in USD, has at times shown a negative correlation with the USD.

For my part, when I retire I will be spending mostly HKD but also reasonable quantities of NZD/AUD so I have allocated most of my assets to Hong Kong and a smaller part to New Zealand and Australia.

 

[Nords]

Is anyone here hedging their fixed in a significant way, and if so, how?

I'm trying to stick to the very few areas of competence that I've developed so far (and will probably ever develop): international equity index ETFs like EFV and domestic dividend ETFs like DVY. I figure their profits will give plenty of currency hedging.

Berkshire also does some currency arbitrage but I doubt that it's enough to move the meter on my share price.

 

[cardude]

Yes, the rest of my port is equities, and I have a little foreign exposure there, but I was just wondering about the cash.

What about the EFT, WIP-- it's a broad group of countries' inflation protected bonds, but not including the US.

 

[73ss454]

I'm just buying up Iraqi Dinars.

 

[cardude]

I'm trying to stick to the very few areas of competence that I've developed so far (and will probably ever develop): international equity index ETFs like EFV and domestic dividend ETFs like DVY. I figure their profits will give plenty of currency hedging.

Berkshire also does some currency arbitrage but I doubt that it's enough to move the meter on my share price.

Yeah, I have no idea how to trade forex and I'm sure I would get my a** handed to me if I tried.

I've never really thought much about the "dollar is going to crash" warnings, but I'm starting to think about it now. The problem is I've lived my entire life in the US, and like many of us I don't really have a good grasp of currency fluctuations like someone from, say , the EU.

 

[Darryl]

Did the forex practice account a few years ago. Thank God it was only pretend money.
Crazy = a rookie trying to make curency bets against people who do it all day long for a living.
Holding 45% of your port in FI denominated in your home currency = uh careful?
I use international equities as the diversifier VFWIX, DLS, VWO.
I also like TIPS (in IRA) above 2% real and Ibonds when they have some kind of real yield (small annual purchase limits).
I did change my IPS a little over a year ago to allow purchasing silver if it falls to $12 an oz. Doesn't seem likely I wll trip that trigger anytime soon.

 

[traineeinvestor]

Did the forex practice account a few years ago. Thank God it was only pretend money.
Crazy = a rookie trying to make curency bets against people who do it all day long for a living.
Holding 45% of your port in FI denominated in your home currency = uh careful?
I use international equities as the diversifier VFWIX, DLS, VWO.
I also like TIPS (in IRA) above 2% real and Ibonds when they have some kind of real yield (small annual purchase limits).
I did change my IPS a little over a year ago to allow purchasing silver if it falls to $12 an oz. Doesn't seem likely I wll trip that trigger anytime soon.

For most of us, buying some overseas equities, bonds etc is far more sensible if you want/need international/FX diversification. Actively trading in the spot/forwards FX markets is much harder, not only because you are trading against full time professionals but also because the leverage commonly used leaves you with no room for error - one bad trade can wipe you out.

 

[Telly]

I'm just buying up Iraqi Dinars.

I bought some TVDinars. Didn't hedge them, though. Have to put them in the fridge here, because it's too warm out there.

 

[nun]

The problem with currency hedging is that you have to decide what to hedge your native currency against, since currencies are all relative. I think a modest allocation to non-USD fixed income makes a reasonable diversifier (I like BEGBX for this, or GIM at a discount to NAV), but anything else and you are essentially getting into currency trading. Hope you have a cast iron stomach if you go down that path.

I'm looking for some UK denominated fixed income as I will probably be moving to the UK in the next few years. Any suggestions other that waiting until I move and opening a 5 year savings account with a UK bank!

 

[Texas Proud]

My boss keeps asking me about hedging the dollar as he thinks it is going to tank...


First thing I ask is 'against what'... IOW, you have to have a stronger currency to get into... I do not think China is it yet.. nor India.. nor Brazil... now, NZ or AUS might be, but their economies are just not big enough to make a difference when you are talking about the world reserve currency... so I do not see where to put my $$$$s...

Second... what am I hedging I mean, my income is in dollars and my expenses are in dollars... if the dollar actually drops a lot, it will not make that big of a difference in my life that a hedge can protect... commodity prices might go through the roof, but that is INFLATION, not a currency hedge...

Last... how long do you 'hedge' By definition, a hedge is to mitigate a potential loss... but there is a time period... are you going to hedge for a year, 5 years Because at some time the dollar will come back IF it falls through the floor... this is another question that I can not answer....

So a currency gamble (since we have established it is not a hedge) is something I would not want to do... I would much rather invest in some overseas companies and hope their earnings go up so my investment goes up...

(IOW, this is like investing in gold.... you are playing the market and hoping you buy low and sell high... not something that is a long term investment)...

 

[cardude]

My boss keeps asking me about hedging the dollar as he thinks it is going to tank...


First thing I ask is 'against what'... IOW, you have to have a stronger currency to get into... I do not think China is it yet.. nor India.. nor Brazil... now, NZ or AUS might be, but their economies are just not big enough to make a difference when you are talking about the world reserve currency... so I do not see where to put my $$$$s...

Second... what am I hedging I mean, my income is in dollars and my expenses are in dollars... if the dollar actually drops a lot, it will not make that big of a difference in my life that a hedge can protect... commodity prices might go through the roof, but that is INFLATION, not a currency hedge...

Last... how long do you 'hedge' By definition, a hedge is to mitigate a potential loss... but there is a time period... are you going to hedge for a year, 5 years Because at some time the dollar will come back IF it falls through the floor... this is another question that I can not answer....

So a currency gamble (since we have established it is not a hedge) is something I would not want to do... I would much rather invest in some overseas companies and hope their earnings go up so my investment goes up...

(IOW, this is like investing in gold.... you are playing the market and hoping you buy low and sell high... not something that is a long term investment)...

OK, the more I read and thing about this, the more I don't want to do it. I'll just take my chances with my dollars, and keep some foreign exposure using equities, which I understand more.

 

[brewer12345]

I'm looking for some UK denominated fixed income as I will probably be moving to the UK in the next few years. Any suggestions other that waiting until I move and opening a 5 year savings account with a UK bank!

It is possible the right brokerage house could sell you some Gilts (UK gubmint bonds) or other related bonds (premium bonds perhaps, where the principal is guaranteed by the gubmint and the coupon is a periodic lottery draw). More simply, I would probably look for a pound currency etf or maybe a CD at Everbank.

FWIW, this is one of the situations where I think currency hedging is appropriate for a retail investor.

 

[Ed_The_Gypsy]

My equities are 50/50 US/international as are my small bond funds. It has worked out OK so far.

 

[donheff]

I have a significant portion of my portfolio in fixed (45%), and much of that is CD's, and ALL of if it is dollar denominated. I was recently called crazy for having it set up this way,

Crazy How much of a difference could a normal person (not a FOREX expert) make with a hedging strategy? Per other comments here you need a "cast iron stomach" to go this route and/or you should'nt risk more than a "percent or two." Sounds like an attempt to get one more non-correlated asset in the mix. So going from a couch with 6 potatoes to a couch with 7 potatoes -- one couch is great the other crazy? I don't get it.

 

[BigNick]

FWIW, this is one of the situations where I think currency hedging is appropriate for a retail investor.

You would have to be confident that Sterling is going to outperform the dollar. With the UK's budget deficit as a % of GDP pretty close to, if not larger than, that of the US (14% vs 10% in 2009, perhaps 12% vs 11% in 2011), I'm not sure if that's a good bet. (All those articles about how the Euro will collapse because of the average 7% deficit in the Euro zone, fail to specify exactly relative to what the Euro will collapse.)

 

[brewer12345]

You would have to be confident that Sterling is going to outperform the dollar.

No, you would not. In this case, the poster is only seeking to hedge future expenditures denominated in pounds. As such, he does not really care what the absolute performance of the pound is, on that he has hedged away some unwanted currency exposure.

 

[Independent]

I'm in the "most of my purchases will be US sourced" camp, so I'm somewhat immune to currency swings. I also buy the notion that large cap "US" stocks are usually multinationals so they provides some diversification. Then I have TIPS and SS, both tied to the CPI. It seems that the primary risk of dollar declines higher costs for imports, which turns up in the CPI. I know there is still some residual risk, but it's not my biggest worry.