Buying gold or other commodities is also a traditional hedge against exchange-rate risks, and this has become easier in recent years with the creation of exchange-traded funds that specialize in these markets. But gold has not proven to be a great long-term holding, and commodities trading tends to be for the short-term, best left to the experts.
For small investors, investing in foreign stocks and bonds is probably the simplest way to dampen the effects of currency swings. If you buy when the dollar is strong, you will get more shares for your money, because your dollars will be converted to foreign currency to make those purchases. Selling when the dollar is weak generates foreign currency that is then converted to more dollars than when the dollar is strong.
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Many financial advisers say U.S. investors should have 10% to 40% of their stock portfolios in foreign issues to get the full benefits of diversification. With the dollar weak, this probably isn’t the best time to jump into foreign investments with both feet, but it could make sense to gradually get your foreign holdings up to your target level during the next year or two.
The easiest way to invest in foreign securities is through mutual funds and exchange-traded funds. Most of the big fund companies offer one-stop-shopping with funds that invest in securities from many countries. The Vanguard Total International Stock Index Fund (Stock Quote: VGTSX), for example, owns European, Asian and emerging-market stocks. T. Rowe Price (Stock Quote: TROW) has the International Equity Index Fund (Stock Quote: PIEQX), and Fidelity has the Spartan International Equity Index Fund (Stock Quote: FSIIX), both similar to the Vanguard offering.
Over the long run, the dollar’s ups and downs tend to even out, so exchange rates are not something ordinary investors and consumers should spend too much time worrying about. For most people, the biggest concern is whether to vacation overseas. All else being equal, it’s best to do it when the dollar is strong and see the U.S. when the dollar is weak.
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