In these volatile times, isn't it fortunate that so many people seems to have the ability to explain what is really going on? Vermont Royster, in an article in the Wall Street Journal said it best:
In that column [Abreast of the Market], you can also read selected post-mortems from brokerage houses, stock analysts and other professional track watchers explaining why the market yesterday did whatever it did, sometimes with predictive nuggets about what it will do today or tomorrow. This is where the fascination lies. For no matter what the market did -- up, down or sideways--somebody will have a ready explanation.
At one time, Alan Greenspan thought it was "evident" why the dollar was strong against the Euro. Now many investors believe it is "evident" that the dollar will continue its decline.
Does anyone really know? And if they don't, and they tell you they do, why would you rely on them for investment advice?
I deal with these issues and others in this week's column.
Thanks for your questions and your provocative comments. I read all of them and answer as many as space permits.
Question From mommadona:
All I want to know at this time is how can I, as an individual and looking to full retirement in a couple years, INVEST IN EUROS.
We've done everything 'right' - we put our money in savings, we invested wisely, and now - watching it dribble away - BECAUSE IT'S ALL IN DOLLARS.
So, how DOES this older couple find INVESTMENT OPPORTUNITIES in EUROS?
Waiting with bated breath...
"Investment opportunities" are the operative words in your question.
The reality is that an investment in Euros would be speculation by you that the value of the dollar will continue to decline against the Euro. I have no idea whether this will occur, but that is precisely my point.
Predicting currency values is very risky business. Ask Alan Greenspan. Here are the reported views of the much venerated Chairman of the Federal Reserve in November, 2001, in an article published in USA Today:
Federal Reserve Chairman Alan Greenspan said Friday the dollar's strength against the new European currency, the Euro, stems from America's better performance in boosting the productivity of the workforce.
Greenspan cautioned that it is always difficult to forecast directions in currency rates. But, he said, it seems evident that the dollar's surprising strength against the Euro over the first three years of the Euro's life owed a great deal to more flexible U.S. workplace.
What seemed "evident" to Mr. Greenspan at the time, no longer seems to be the case.
Consider the fact that eventually you will need to convert your Euros into dollars, assuming you continue to live in this country. How confident are you that the dollar will not recover against the Euro at that time? If it does, you will suffer the consequences.
I don't understand your observation that the weakness of the dollar is causing your savings to "dribble away." While the declining dollar is certainly not a positive factor, since your purchases are in dollars, the impact on your consumption spending is probably not as great as you may believe.
A more prudent decision would be to invest in a globally diversified portfolio of low cost index funds. This should afford adequate protection against the possibility of the continuing devaluation of the dollar, with much less volatility than speculating in the currency markets.
Question From tnoblecampbell:
Dan, Being a fan of you blog for over a year now I fully understand the significance of Index Funds. Lets say I am ready to put $10,000 into a "low cost globally diversified index fund" that you have hammered away at for so long. How do I go about determining my asset allocation? Also, which Vanguard funds should I choose? Thanks again for all your advice, I appreciate the long term, defensive investing tips.
These are important questions that every investor should be asking.
There is nothing more important than your asset allocation. I don't understand the continued fascination of investors with the discredited activities of market timing and stock picking when asset allocation has been demonstrated to account for up to 100% of absolute returns.
There is a free questionnaire on my web site, under "asset allocation". Go to: www.smartestinvestmentbook.com. It will give you an excellent idea of an asset allocation appropriate for you.
The Vanguard funds I recommend are:
- Total Stock Market Index Fund (VTSMX)-For 70% of the amount allocated to stocks;
- Total International Stock Index Fund (VGTSX)- For 30% of the amount allocated to stocks;
- Total Bond Index Fund (VBMFX)- For 100% of the amount allocated to bonds.
One minor correction to your query. Low cost index investing is not "defensive investing." Investors can determine the amount of the risk that is appropriate for them, ranging from very conservative to very aggressive.
I like to think of it as "Smart Investing."
Question From billm23:
Thanks for your advice. Here's my question: I'm investing for retirement in my 401k, as close to your advice as my plan options allow. I want to get start investing outside of the 401k as well -- but with Vanguard funds' $3K initial investment minimums, it will be quite a while before I have enough saved to apply your formula. Should I just let the money accumulate in a savings account? Or look for index funds with lower minimums, even if they have higher fees? Thanks again.
The minimums are a problem. You may be able to get around them by investing in Exchange Traded Funds (ETFs). Here are some ETFs to consider:
- iShares Russell 3000 Index (IWV), for the domestic stock portion of your portfolio;
- iSharesMSCI EAFE(EFA), for the international stock portion of your portfolio;
- iShares Lehman Aggregate (AGG), for the bond portion of your portfolio.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.