Today, we continue the teaching article series: The DSL™ Savings Strategy 101: Diversifying your Savings with U.S. Dollars, Precious Metals, and Foreign Currencies. In this article, I will discuss nine currencies that have outperformed the U.S. Dollar.
Diversifying Your Savings with Stable Foreign Currencies
The concept of buying foreign currencies is an unusual one to most Americans. After all, we trade, transact, save, invest, spend, and work hard for U.S. Dollars. Why then would an American citizen want to hold Swiss Francs or Canadian Dollars? And isn’t investing into foreign currencies a risky bet anyway?
Since 2006, I have been teaching the benefits of building a diversified liquid cash reserve that is equivalent to six months of your gross income. In our day of dollar decline and massive money printing at the Federal Reserve, I have explained the importance of protecting this pool of money from the ravaging effects of inflation. To do this, I created a savings model, that I call the DSL™ Savings Strategy, which seeks to diversify this six-month liquid cash reserve into three separate areas: U.S. Dollars, Precious Metals, and Stable Foreign Currencies.
Holding a portion of your U.S. Dollar savings in the form of stable foreign currencies, for the sake of diversification, is probably not as risky as most people may think. Instead, I would submit to you that holding U.S. Dollars for the last several years has been more risky than holding stable foreign currencies.
First, you must realize that all paper currencies are not backed up by gold or silver. Instead, they are managed by their country’s central bank and their values are based upon many factors, including interest rates and current geopolitical realities. In essence, as time goes by, all currencies are losing their purchasing power to some degree.
To simplify, think of all modern paper currencies as equally-sized small boats on a large body of water. All of these boats (currencies) have a small hole in the bottom of them. Some of them have tiny holes and others have more gaping holes. The point is that all of the boats are sinking.
Your goal, in using foreign currencies to diversify your savings, is to find the currency that has the smallest hole in the bottom of its boat.
Most Americans have never thought about holding their savings in a foreign currency. Many think it would be too risky. But I can assure you that Canadians do not rush out, after receiving their weekly paycheck, to convert their Canadian Dollars into U.S. Dollars. Do you know why? Just look at the chart below showing the U.S. Dollar’s performance against the Canadian Dollar for the last two years.
How about those living in Australia? Do you think that they are lying awake at night wondering if they should convert their “risky” Australian Dollars into U.S. Dollars? Look below at the U.S. Dollar’s performance against the Australian Dollar for the last two years.
How about those living in Switzerland? Are they chomping at the bit to convert to U.S. Dollars because it is the “safest currency” in the world? Look at this two-year chart of the U.S. Dollar’s performance against the Swiss Franc.
And surely those in Norway would not dare to leave their life savings in the Norwegian Krone? Well, the numbers below speak for themselves.
And, of course, there’s the emerging market of Brazil. How’s their poor “risky” currency holding up against the mighty U.S. Dollar? Look at this two-year chart of the U.S. Dollar’s performance against the Brazilian Real. Which currency do you wish you would have held over the last two years?
And how have those in New Zealand fared over the last two years? Look at the chart below.
Then, of course, there is the corrupt nation of South Africa. How can that country’s citizens possibly sleep at night, holding the “risky” South African Rand?
How about the Singapore Dollar?
And then of course, there is the Japanese Yen. Surprised?
As you can see, the “risk” appears to be in holding U.S. Dollars… not in holding stable foreign currencies.
Tomorrow: I will share with you three different ways that you can buy foreign currencies. I will also tell you which ones I personally like right now.
Here at Follow The Money, we are working hard to create solutions for you during these difficult times of economic crisis. We invite your feedback and comments on how we may serve you better.
Jerry Robinson – FollowTheMoney.com