Why your portfolio needs currency diversification?

on May 7, 2012 in Currency, Home | 5,821 comments

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Despite its status as the world’s reserve currency, it’s no secret the USD has been on a long steady decline. Given the state of the economy, the possible effects of financial stimulus, and the current state of interest rates, we believe the long-term trend is bearish. I would recommend you to diversify a portion of your USD denominated portfolio.

The idea behind this strategy has to do with the fact that if you hold your investments assets in your local currency, then your portfolio will mirror the performance of the assets itself. Nevertheless, if assets suffer from a downturn, so will your portfolio’s value since no hedging investments were made.

How much of a portfolio should be allocated to currencies? It depends on the investor’s individual view on the USD. In the absence of a fundamental view, about 5% makes sense for a conservative investor looking for diversification.