To stave off recession, the Federal Reserve has been attempting to foster more market demand by reducing the federal funds rate. That is the overnight borrowing price for banking institutions; it activates the reducing of almost every other loaning prices. This affects your retirement funds in two ways: you make less interest at the bank and your vacation to Europe costs you more.
Reduced loan prices create more need for services and products. But too much borrowing may produce artificially created demand leading to inflation - the reducing of a dollar's value. Do not let a dropping dollar bring both you and your retirement funds down.
Europe has kept their prices fairly stable for the Euro. As a result the number of dollars needed to buy a euro has been growing. In a year from March of 2007 to March of 2008, it is gone from 1.33 $/euro to 1.55$/euro . That is a decline of 15% in the worth of the dollar when comparing to the euro.
You can take advantage of the deteriorating dollar by possess some retirement funds in foreign investments. That is because foreign investments are denominated in - and thus bought and redeemed - in that foreign currency.
There are many different ways to position some retirement funds outside the dollar. You can gain instant diversification out of the dollar just by buying foreign stocks, bonds, mutual funds, ETFs, etc. Simply by buying these foreign securities, you gain exposure to foreign currencies that are increasing against a deteriorating dollar.
If you purchased a euro Certificate of deposite with your retirement plan and the euro rose 3% versus the dollar, then you'd get that 3% on your preliminary investment. In addition to, you'd get the average interest rate the Euro CD paid.
Therefore in the event you purchased a foreign security dominated in Euros with your dollars in March 2007 and sold it in March of 2008, you'd have made 15% on your dollar investment even when that foreign security paid no interest, no dividends, and didn't increase in its worth in Euros. Of course, an increase in any of those would add to you're general gain in dollars and further help your foreign retirement funds.
Keep in mind, though, that a rise in the dollar rises against your foreign currency, will subtract that percent of rise from what ever gain your foreign investment produce in its own currency. Which means you could possibly lose a few of your preliminary investment. Therefore, only a part of your retirement funds must be in non-dollar assets.
You might also like:
Leave a Reply