Do you hedge against the possible devaluing of the US dollar?

[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?

 

[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.

 

[TechLead]

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?

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)

 

[Gumby]

That's why I have DODFX as part of my portfolio.

 

[OldShooter]

... Does anyone else worry about this? If so, what are you doing about it?

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/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-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.

 

[Austin704]

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.

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!

 

[razztazz]

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.

 

[MichaelB]

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?

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.

 

[RobbieB]

Nah, I don't worry about the dollar losing value.

 

[TechLead]

Neither Europe nor Japan (nor anyone else) want the role of reserve currency.

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.

 

[Animorph]

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.

 

[Rianne]

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!

Meant in jest.

 

[OldShooter]

... 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. ...

True enough. If.

...Neither Europe nor Japan (nor anyone else) want the role of reserve currency. ...

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.

 

[MichaelB]

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.

“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.

 

[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.
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)

 

[Fermion]

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!

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.

 

[Koolau]

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>

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.

 

[jollystomper]

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.

 

[mrfeh]

Does anyone else worry about this?

I don't.

 

[Markola]

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.

 

[Austin704]

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.

This idea also confuses me a bit. I have an International Index Fund that invests in foreign companies, but the fund itself is denominated in USD. So, if the dollar were to collapse (hypothetically), how would holding foreign stocks help in this scenario? My dollar denominated fund would still be devalued, right?

 

[Austin704]

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.

I think I’ll start my doomsday prepping now... Just in case.

 

[W2R]

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?

Not a whole lot. My portfolio is mostly in broad index funds, with some international but not much. I am not used to spending much money, and I don't spend as much as I could. I plow any excess back into my portfolio. By now, my portfolio has grown to be a bit more than I need to live on but I haven't really expanded the lifestyle to fit the portfolio, KWIM? If the dollar is devalued, I could absorb some losses; but I suppose that at some point in the scenario you suggest, it is possible that I might have to cut back on my spending.

That would not be ideal, although like most of us I have BTDT during accumulation phase. Luckily I don't need much to lead a happy retired life.

I am 72 years old so I don't have as many years to provide for, as some of you younger folks do.

 

[Sunset]

This idea also confuses me a bit. I have an International Index Fund that invests in foreign companies, but the fund itself is denominated in USD. So, if the dollar were to collapse (hypothetically), how would holding foreign stocks help in this scenario? My dollar denominated fund would still be devalued, right?

While they show your fund in USD, the actual companies would be foreign, so the value of the fund would go up given a USD decline, as long as the currencies of those foreign countries went up relatively speaking.

Now if your fund is hedged in USD, what that means is they try to compensate for any fluctuation in the USD currency value. I personally don't like these kind of funds because if I'm investing in foreign countries, I want my return to reflect the value of everything it's invested in. If I think a country is lousy, and will collapse, then I just don't want to invest in it, so no need to hedge.

Second reason I don't like this kind of hedging, is it costs the fund money to do.

 

[LitGal]

Yes, I Do Worry......

I understand the need for government intervention during this pandemic.
But every time Congress passes another stimulus/checks-to-the-American people/unemployment enhancement package, I see a further bloating of our national debt......that we are kicking the can down the road for our kids and grandkids to deal with later.

But this is a little too easy to say. I am privileged to be retired, as is my husband. So we continue LBYM, living on our pensions and SS. We know just how lucky we are to have them.

Since I fear inflation from the US printing more $, I avoid using my nest egg, hoping it will help my son and his children in their futures. It will also (hopefully) be a safety net if I should live into my '90s (as my predecessors have).