My Personal Finance Odyssey

Almost every day I read about how the US dollar continues to drop versus foreign currencies. During my travels abroad I have experienced this first hand when exchanging dollars for the local currency. The depreciation of our currency coupled with the recent decline in interest rates feels like a double-whammy in my pursuit of wealth creation.

As a result, I have been trying to figure out ways to minimize the damage and even capitalize on the opportunity. As I thought about this, the most obvious options seemed to be:

• Investing in foreign stocks (which I already do)
• Foreign currency trading

I don’t actively trade in stocks and I certainly can’t imagine myself actively trading in foreign currency. Regardless, I wanted to investigate other options. In particular, I was interested in how to improve the earnings on my cash position which is a fairly significant portion of my overall portfolio ($120K or 33%), excluding my home equity.

Portfolio Allocation – Feb

Here is what I found:

Foreign Currency ETFs – Essentially, the ETF will hold actual foreign currencies you are investing in and appreciate or declined based upon their performance against the dollar. This is fairly straightforward in that you are making a bet (much like currency trading) about how that currency will do against the US dollar. One of the downsides is that the ETF is not quite as liquid and you may not be able to get out as quickly if the market starts to tank. However, purchasing an ETF seems much simpler than setting up a trading account (particularly for smaller investors like myself who wouldn’t really use it very often).

Foreign Currency CDs – this is a new product for me that I had never really read anything about until very recently. This works just like a regular CD you would purchase at you local bank…they are even FDIC insured! The primary advantage is that you can invest your US dollars at higher interest rates (ex: current interest rates in New Zealand are as much as 6.75% for a 12-month CD) than you could otherwise with prevailing US interest rates. In addition, you may also get a boost to your overall return should the current appreciate against the dollar. Of course, the flip-side is that it could go the other way and your return could then be less. Despite the risks, I find this option very intriguing as I can open an account with a bank branch within the US and it would be FDIC insured. Assuming I could find enough of a rate difference and feel good about the potential current fluctuations, I could improve my real rate of return on my cash. I don’t think you would view this like an equity investment with potential for significant price appreciation, but rather an aggressive play with your cash. One of the banks I have seen advertise this is Everbank.

Foreign Currency Loans – This potential option really got me excited. Of course, as far as I can tell thus far, it doesn’t seem like something that is readily available in the US, but something more widely done in other countries such as the UK, for example. In particular, for things like mortgages. In this case, your loan is made at the prevailing interest rates of the foreign currency and you pay back your loan in the denomination of the foreign currency. The advantage is that you could obtain a loan at a much lower interest rate in the foreign currency (ex: 2.5% in Japanese Yen). Again, the potential downside is that you are exposed to the currency risk. If the Yen rises…bonus! If the Yen falls significantly…ouch, your monthly payment just went up. Also, for mortgages, many countries do not have loan terms that are as long as the US 30-year mortgage. Obviously, this raises your monthly payment…very unattractive for many in the US where mortgages terms are increasing (35 and 40 year mortgages becoming more common) because we can no longer afford the 30-year due to rising home prices and increasing debt. Anyway, although this doesn’t seem like an option for most of us right now, I think it is a fantastic concept that would increase the competition here in the US and open up a lot more options for astute borrowers. Of course, utilized improperly, it could also become the next subprime mortgage (people making big bets that don’t pan out).

Offshore Bank Account – I also looked into opening a foreign bank account so I could have funds invested there earning the local interest rate. HSBC seemed to have some options via their HSBC Bank International. Take a look at their quick guide to Ibanking. There are no additional fees to open up these types of accounts, although there are higher minimum balances required (ex: 25,000 British Sterling or currency equivalent) if you want to avoid a monthly service charge (ex: 20 British Sterling or currency equivalent). The best part is it appears that everything can be transacted online. I think the advantages and disadvantages of such an account are similar to the others, with the constant risk of currency fluctuation. The additional advantage here seems to be the ability to move funds in/out with relative ease and speed.

I have not made a firm commitment to pursue any of these options yet. However, as I mentioned, I find myself very interested in the CD…particularly as US rates appear to be headed downward for in the near term (next 12 mos). I don’t think these options make sense for everyone…but I think it could for some. Regardless, I’m glad to know I have some additional options available to me that I was not really aware of.

If anyone has some experience with this and /or knows of some other options I have not yet explored, please let us know!