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Do you hedge against the possible devaluing of the US dollar?
07-30-2020, 08:20 AM
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#1
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Recycles dryer sheets
Join Date: Aug 2016
Location: Austin
Posts: 182
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Do you hedge against the possible devaluing of the US dollar?
I’ve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I can’t help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.
Does anyone else worry about this? If so, what are you doing about it?
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07-30-2020, 08:26 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Aug 2017
Location: Champaign
Posts: 4,677
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Why worry? We'll go back to bartering and everyone will be in the same boat. I think TromboneAl (in case you're still reading, Al. We miss you) should write a novel about the world without money.
__________________
"Do not go where the path may lead, go instead where there is no path and leave a trail."
Ralph Waldo Emerson
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07-30-2020, 08:28 AM
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#3
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gone traveling
Join Date: Jul 2020
Posts: 100
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Quote:
Originally Posted by Austin704
I’ve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I can’t help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.
Does anyone else worry about this? If so, what are you doing about it?
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You better believe it. I hedge by having Index ETFs, especially International Index ETFs which go up with dollar going down.
I should had bought some gold. (Hindsight 2020)
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07-30-2020, 08:45 AM
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#4
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Administrator
Join Date: Apr 2006
Posts: 22,923
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That's why I have DODFX as part of my portfolio.
__________________
Living an analog life in the Digital Age.
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07-30-2020, 08:53 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
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Quote:
Originally Posted by Austin704
... Does anyone else worry about this? If so, what are you doing about it?
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Well, "worry?" Probably not. I don't worry about things I can't control but I do try to have defenses against significant risks.
In the case of the dollar, we hold almost all of our equity tranche in VTWAX. This is a cap-weighted total world fund, so IIRC the US is about 55% and ROW is about 45%. If the dollar gets hit to the tune of, say, 20%, on paper that ROW portion will go up about 25%. In reality there will be a huge mess, with maybe 20% inflation in the US as everything bought and sold on the world market goes up in dollar terms. Food, oil, consumer electronics, ... Secondary effects will raise prices for plastics, air travel, etc. and prices of local services (barbers, for example) will rise as they try to survive the inflation. This is inflation that monetary and fiscal policy cannot touch, either. But in the end the people like us and @TechLead will benefit from our international holdings.
So will it happen? Almost certainly but no one knows when or how. The Euro is a mess because southern Europe is a mess. The ruble is off the table as a candidate because Russia has cemented its place as an enemy of the West. No one trusts China, ... and so on. The dollar is thus the least bad choice. The most probable outcome is a basket of currencies like the IMF's SDRs: https://www.imf.org/en/About/Factshe...wing-Right-SDR I am not smart enough or educated enough to understand all the details here but it is clear that the world hates us mostly on general principles but also because we are able to use our reserve currency position to punish people we don't like.
Edit: Forgot to mention we hold 90% of our fixed income tranche in TIPS. Indirectly that is a devaluation hedge.
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07-30-2020, 11:45 AM
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#6
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Recycles dryer sheets
Join Date: Aug 2016
Location: Austin
Posts: 182
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Quote:
Originally Posted by Rianne
Why worry? We'll go back to bartering and everyone will be in the same boat. I think TromboneAl (in case you're still reading, Al. We miss you) should write a novel about the world without money.
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Well, because I’d rather not go back to bartering as an old man... I’d rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, I’d like to know what they are!
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07-30-2020, 11:52 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Apr 2005
Location: Midwest
Posts: 2,960
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My only hedge is the same one I've been using since the '70's. Spend less now in case I need the money later.
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07-30-2020, 12:30 PM
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#8
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,518
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Quote:
Originally Posted by Austin704
I’ve never been one to worry much about the value of the US dollar, but with all the political turmoil in the US, contracting GDP, and mounting federal debt (with no end in sight), I can’t help but wonder whether my hard-earned retirement savings will ultimately be devalued or possibly rendered worthless if the dollar collapses and/or loses its reserve currency status.
Does anyone else worry about this? If so, what are you doing about it?
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There is political turmoil, contracting GDP and mounting federal debt everywhere in the world. So, take a step back, take a deep breath, and ask what are the alternatives.
In one scenario, the US$ loses value relative to other currencies. For that to have a meaningful impact on us, the Yen or the Euro would need to gain substantial value. That’s not likely, as their central banks will probably intervene in the currency markets to keep their currencies within a range. If central banks continue to act as they have, the US Treasury bond will continue to be the global safe asset and Treasuries the most liquid market in the world. Neither Europe nor Japan (nor anyone else) want the role of reserve currency.
The other scenario is, in aggregate, the major world currencies - Yen, Euro, Franc, US$, all lose value. This is posisble, especially if all the central banks monetize the debts. But there needs to be some inflation. In that case, one would want to own a basket of assets that will hold real value over time. Commodities, real estate, and (mostly) equities.
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07-30-2020, 12:31 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2016
Posts: 8,968
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Nah, I don't worry about the dollar losing value.
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07-30-2020, 12:44 PM
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#10
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gone traveling
Join Date: Jul 2020
Posts: 100
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Quote:
Originally Posted by MichaelB
Neither Europe nor Japan (nor anyone else) want the role of reserve currency.
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Why not? Everybody would love to have currency that is Global Reserved Currency. USD is now 60% of global reserves (Going down in last 4 years)
This is what allowed us to print all that money and get away with it. It is a great advantage US has over other central banks.
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07-30-2020, 12:59 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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I worry enough about it to have 25% of my AA in a global ex-US equity fund. I used to keep 50% international exposure, but my simplified AA wasn't quite as tidy at that allocation. I wouldn't go less than 25% or higher than 50%, but it does provide a significant diversification.
Having a sizable mortgage is also good if we have serious inflation. I will be paying it off with worthless future dollars.
US stocks are probably a partial hedge as well. They have some exposure to foreign economies via global companies and have some ability to keep up with inflation. And like many foreign economies, a weak US dollar would help our exports.
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07-30-2020, 01:22 PM
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#12
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Thinks s/he gets paid by the post
Join Date: Aug 2017
Location: Champaign
Posts: 4,677
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Quote:
Originally Posted by Austin704
Well, because I’d rather not go back to bartering as an old man... I’d rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, I’d like to know what they are!
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Meant in jest.
__________________
"Do not go where the path may lead, go instead where there is no path and leave a trail."
Ralph Waldo Emerson
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07-30-2020, 01:40 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2017
Location: City
Posts: 10,308
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Quote:
Originally Posted by MichaelB
... If central banks continue to act as they have, the US Treasury bond will continue to be the global safe asset and Treasuries the most liquid market in the world. ...
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True enough. If.
Quote:
Originally Posted by MichaelB
...Neither Europe nor Japan (nor anyone else) want the role of reserve currency. ...
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Actually not true. Europe has already created a workaround to avoid US$ for commerce with Iran. The IMF's SDRs are also a workaround. Japan is probably not a player until their economy improves substantially, but Brussels would love to become what New York presently is.
One of the big international issues is that the dollar's status permits us to use our banking system as a political weapon. People hate that.
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07-30-2020, 01:45 PM
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#14
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,518
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Quote:
Originally Posted by OldShooter
Actually not true. Europe has already created a workaround to avoid US$ for commerce with Iran. The IMF's SDRs are also a workaround. Japan is probably not a player until their economy improves substantially, but Brussels would love to become what New York presently is.
One of the big international issues is that the dollar's status permits us to use our banking system as a political weapon. People hate that.
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“Not true”? Just to be clear, are you saying that Europe (or Japan) wants to be the global reserve currency?
The IMF has been proposing SDR for over 50 years. So far, no takers.
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07-30-2020, 02:17 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 16,973
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I'm not too worried.
If the US dollar devalued by 25% for example, it wouldn't really hurt too much.
It would mean imported things go up in price, but all the stuff produced here (food) would remain the same price.
So oil (gas) would increase, but it's already cheap so an extra 50 cents won't hurt most folks.
International travel would see some steep increases.
Just ask Canadians, how has it been since their currency devalued from 100% USD to 72% USD starting in 2013 (approx)
__________________
Fortune favors the prepared mind. ... Louis Pasteur
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07-30-2020, 03:10 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2012
Location: Seattle
Posts: 5,991
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Quote:
Originally Posted by Austin704
Well, because I’d rather not go back to bartering as an old man... I’d rather continue to have more than enough to live comfortably... And if I can take defensive steps now to mitigate the risk, I’d like to know what they are!
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I dunno, it could be fun.
"I'll trade you two depends and one 6 oz tube of Prep H for that chicken. I'll also throw in a box of Werthers Orginials.
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07-30-2020, 05:46 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,713
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Quote:
Originally Posted by Sunset
I'm not too worried.
If the US dollar devalued by 25% for example, it wouldn't really hurt too much.
It would mean imported things go up in price, but all the stuff produced here (food) would remain the same price.
<SNIP>
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I tend to agree. I might replace a thing or two before I kick, but I have NO plans to "buy" anything (imported or otherwise) other than consumables. Got more than I want of "stuff" and don't want anymore.
I think my fear - if the dollar significantly devalued - would be that SOMETHING caused it. Whatever that something would be (maybe world catastrophe, US catastrophe, another COVID, etc. etc.) might be much worse than being able to buy less imported stuff. Naturally, since I'm no economist, YMMV.
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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07-30-2020, 07:32 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2012
Posts: 6,098
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One cannot hedge against everything in life. For some things one just plans and hopes for the best. For this one I will just go with the flow.
__________________
FIREd date: June 26, 2018 - "This Happy Feeling, Going Round and Round!" (GQ)
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07-30-2020, 08:11 PM
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#19
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Thinks s/he gets paid by the post
Join Date: Jul 2013
Posts: 1,871
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Quote:
Originally Posted by Austin704
Does anyone else worry about this?
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I don't.
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07-30-2020, 08:29 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Nov 2013
Location: Twin Cities
Posts: 3,927
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Our VG International Bond Index Fund is supposed to be hedged. Our VG International Stock Index Fund would have a relative tailwind if the dollar falls, so that’s a hedge. Altogether, we have about 28% international exposure currently and it’s fine with me if it becomes a growth engine in the portfolio. Otherwise, I agree with the comments above that the dollar will remain the reserve currency due to lack of viable alternatives and, longer term, a weaker dollar means good things for U.S. manufacturing, so that’s a kind of hedge, plus big U.S. companies already earn globally, another hedge. No need to worry.
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