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The Falling Dollar

Chris Farrell Mar 7, 2008

Question: The dollar continues to hit new lows almost every day. What is the retired investor to do to protect his/her portfolio from the effects of the falling dollar? Ken

Answer: Well, the dollar reached another new low against the Euro today. For U.S. individual investors, the main impact of the falling value of the dollar in the international currency markets comes through the inflation rate. A falling dollar tends to make imports more expensive which, in turn, leads to heightened inflation expectations.

For example, import prices have risen 13.7% since January, 2007, representing the largest year-over-year increase since the index was first published in September 1982. The rise in import prices may be one reason the producer price index over the past 12 months has risen at a 7.4% rate and the consumer price index over the same period is up by 4.3%. (In the past three months the CPI has been running at a 6.8% pace.) You’re right to be concerned since inflation depreciates the value of savings.

To protect your portfolio from rising prices means making sure you have a foundation of securities that won’t lose their value during inflationary times. That can mean a heavy dollop of “cash”–Wall Street jargon for short-term Treasury bills, money market mutual funds, and other creditworthy short-term fixed income securities. It also suggests owning Treasury inflation-protected securities (better known as Tips), I-bonds (the inflation protected savings bond), and blue chip stocks paying a good dividend. Gold and other commodities are classic hedges against inflation, although commodities are volatile and they’ve already had enormous upwards movement in recent years.

By the way, taking inflation into account is critical for any retiree managing a portfolio. Even in an environment where the dollar is strong, inflation is still the big risk that most retirees face. I wouldn’t do anything dramatic during these turbulent times, but I would evaluate my portfolio to see how protected it is against inflation and, if additional moves are called for, make those investment shifts opportunistically.

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