As a lover of international travel, I am not happy about the current status of the U.S. dollar. My family’s recent Mediterranean cruise cost about 10% more than it would have done had we taken it as scheduled a year ago when a case of the chicken pox cancelled the trip. By my calculations, the chicken pox cost us an additional $1,000, which is about $80 per pock based on my son’s pox count. Even more painful is the fact that international travel is up by about 50% from five years ago.
As an investment advisor, I am not happy about the status of the dollar, either. Still, I am certainly not recommending that clients dump their dollar-denominated investments. While the idea of getting out of U.S. investments may sound extreme, there is a growing tendency among individual investors to increase international investments even to the point of exiting all U.S. investments.
Even several of my clients have asked whether I think we should exit the U.S. markets altogether. Based on the number of clients making that suggestion, I would guess we are getting close to a bottom for the dollar. The widespread worry about the dollar reminds me of late 1999 when it was common to have clients wonder whether we should be increasing their portfolios’ allocation to dot.com and tech companies. Fortunately, I was able to convince all but a handful to stay the course with their existing allocations.
Today, my advice remains the same. I don’t recommend that investors lighten up or eliminate U.S. dollar-denominated investments from my clients’ portfolios. While we may not have seen the bottom of the dollar decline, I believe it would be a serious mistake to eliminate U.S. investments from a portfolio—just as it would be a mistake to place 100 percent of your portfolio into any one asset category. The U.S. is not going to become a third world country any time soon.
There are some advantages to a lower currency valuation. We’ve seen our trade deficit shrink and an 11.1 percent growth in U.S. exports since May. There is also a 6.8 percent increase in foreign tourists this year.
There is another reason I don’t recommend investment changes because of concerns about the dollar. Readers of this column know that I’ve taken a more aggressive position than the average investment advisor, recommending that most portfolios have 40 percent to 50 percent of their investments in international securities. I don’t see a need to increase international allocations above this.
So, what I tell clients is this: If you’ve followed my advice and diversified your portfolio into five asset classes or more, and you’ve put at least 40 percent of your equity investments in international funds, you are in great shape.
I also remind clients that fluctuations such as this, no matter how much we may dislike them, are normal and cyclical. The dollar will eventually bottom out, and at some point in the future the cycle will change and it will be international investments that will be performing poorly. Certainly, when that happens the talking heads will be saying investors should be exiting all international markets and putting everything into U.S. holdings. I’ll just bet that the majority of investors will do that, precisely at the wrong time, once again.
The dollar’s current cycle of decline is just one more reason why it is essential to hold onto the basic rules of successful investing: maintain a diversified portfolio, don’t indulge in knee-jerk reactions to market changes, and focus on the long term.