Investors already have a lot on their portfolio to worry about and adding the worry of the falling dollar could just be a nail on their investment dreams. There are experts who have started to mention “prak dollar”, and this has been one of the major worries lately for the US Stock market.
A falling dollar would be a relatively new occurrence for the country because the US dollar index, DXY, has been more or less growing steadily for a decade now. The dollar has had a gain of around 25% in comparison to other foreign currencies and hence it is needless to say that this has been a great decade for the U.S. Equities.
The school of economic thought subscribed by President Trump is of the view that the confidence of the US market is excellent. If it seems to falter on any given date, both the dollar and the U.S. Stock market would definitely be hit hard. When we compare this theory to practical insights, we find it true because when the dollar trends low, the international stock markets enjoy a peak. This is more because the value of other currencies takes a boost and the cash flow as per dollar units becomes higher than it would be if the dollar is at its peak point.
For example, when the dollar index fell by 34% between 2002-2007, the MSCI EAFE ETF produced a staggering return of 14.1% annualized. However, from 2011 when the dollar started gaining speed, the ETF returns came down to its ⅓ which is around 5% annually.
The key to successful Portfolio building
This inverse relationship between dollars and international stock is the key to building a portfolio that shines even if the dollar takes a hit. The foremost thing you need to do is to ensure that you balance your portfolio with international stocks so that if the dollar takes a dip, the value of those international stocks will rise and you will eventually land amidst profit. Your portfolio should have an equal percentage of foreign allocated stocks when compared with US stocks.
When dealing with foreign stocks, there’s no assurance of those performing well enough when there’s a dollar boom in the coming days. However, this should not stop you from choosing foreign stocks and in this period of instability, they should be your go-to portfolio savior option.