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A Trip to France

Question: My wife and I are planning on going to France next summer and have been saving money for the trip. But the exchange rate is making our dollars less and less valuable overseas each month. What is the best way to help preserve our buying power? Thanks, Pat, Lakewood, Ohio

Answer: I'm jealous. France in the summer is delightful. The food. The history. The scenery. Okay, enough of that reverie and on to your financial question.

As I'm writing this, the dollar is near a record low against the Euro. At the moment it doesn't appear that the downward pressure is going to let up anytime soon. Factors include the weakening U.S. economy, low interest rates, and the reconsideration by a number of oil-rich Persian Gulf nations and a handful of dynamic Asian economies of their reliance on the dollar.

However, some Wall Street currency mavens believe that the Euro value has gotten way too high relative to the dollar, and there could be some narrowing of the exchange rate by the time you take your trip. Problem is, economists don't have a good model for forecasting currency values. It's anyone's guess what the dollar will be worth by summertime.

First, I would plan on spending more in France. It's simply going to be a more expensive vacation. Next, I'd consider taking out a hedge or insurance policy against the dollar going lower by putting some of the trip money into a short-term certificate of deposit denominated in Euros. For instance, Everbank of St. Louis, essentially an Internet operation that is part of First Alliance Bank in Jacksonville, Fla., offers CDs in a number of foreign currencies, including the Euro.

There are a number of other options, ranging from mutual funds that invest in overseas short-term money market type investments to exchange traded funds that concentrate on Euros. For instance, Rydex Investment offers an ETF that allows you to speculate on the appreciation of the Euro and the depreciation of the dollar. However, investments like this are risky.

Remember, you're taking out an insurance policy so if the dollar improves against the Euro within your travel time frame, you'll take a slight financial hit. Of course, if the dollar stays weak or even heads lower, the cost of your trip will go up a bit more.

Either way, I bet it will be a memorable trip.

12/13/07 by Chris Farrell

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The Falling Dollar

Question: How can I hedge against the falling value of the dollar? I have 400K in TIAA/CREFF, half in TIAA and the other half split between Social Choice stock/bond fund and inflation linked-bonds. I plan to retire in 2 years and am only concerned about capital preservation. TIAA/CREFF has no Euro or other international bond funds. Thanks, Chris. Dave

Answer: In one sense you don't have to worry about the decline in the value of the dollar relative to most currencies unless you plan on traveling to, say, Europe. The dollar is weak against the Euro, and you don't get very many Euros when you exchange your dollars at the bank. But almost everything else you do in terms of buying, borrowing, and investing is in dollars here at home.

That said, the big concern from the declining value of the dollar is that it will contribute to rising inflation pressures. Over the past 12 months consumer price inflation has been increasing at a worrisome 4.3% rate. Much of the rise comes from higher food and energy prices, but a weak dollar isn't helping.

Inflation is the enemy of savers. Take this example from John Brennan, the head of the mutual fund giant Vanguard. "If you are 60 years old today and spend $50,000 a year to maintain your lifestyle, you would need to spend about $90,000 when you are 80, assuming a low 3% average annual inflation rate," says Brennan. "At 5% inflation, you'd need about $133,000 a year."

The good news is that you're already making the smart investment to protect yourself from the declining value of the dollar and the risk of higher inflation: Inflation-linked bonds. These are fixed income securities that preserve the value of a dollar--plus interest--against the ravages of inflation. These bonds adjust to changes in the consumer price index.

The best way to preserve capital is to invest in inflation-indexed bonds, especially the ones offered by the U.S. Treasury. Right now, investors will do better owning 10 year Treasury inflation-indexed bonds versus a traditional 10-year Treasury bond if consumer inflation exceeds an annual rate of 2.3% over the next 10 years.

12/28/07 by Chris Farrell

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Living and Investing Abroad

Question: I'm an American living in Germany married to a German. I do not work, except for small English teaching jobs. My husband works in the German tax field with some international tax aspects. He does not have the time or the interest to invest any money except in a normal German savings account which does not give a good interest rate. I am 38 years old, my husband is 44, and we have 5 children. We are working to get out of a tremendous amount of debt, but I would like to really get serious about putting aside a nest egg. What can I do as an expat who doesn't have a lot of money but would like to begin to get in on the many savings plans in the States that don't seem to be available here in Germany? I am also concerned a bit about the exchange rate.

Answer: It's a good time for you to be investing, considering how strong the Euro is against the dollar right now. Investing in Europe, the U.S., or anywhere in the world is remarkably easy in today's Internet-linked economy. You can work with full service brokers, discount brokers, online firms, plus all the banks and major mutual fund companies will open up an account for you--no matter where you live.

In your case, I think the bigger issue is figuring out how to invest. I have two books to suggest. The first is "The Random Walk Guide to Investing: Ten Rules for Financial Success" by Burton Malkiel. It's a very simple, straight forward book covering the main personal finance topics. I recommend this book a lot to people who want to quick read and introduction to the topic.

The other is a bit dated, but it covers a lot of ground: "The Wall Street Journal Book of International Investing: Everything You Need to Know About Investing in Foreign Markets" by John A. Prestbo and Douglas R. Sease.

02/21/08 by Chris Farrell

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The Falling Dollar

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.

03/07/08 by Chris Farrell

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A European Adventure

Question: I am to take a trip to Europe this summer with two friends of mine before our senior year of high school. I have about all the money I need now to pay for the trip. But, my mom thinks I should start converting some of my money into Euros as the dollar continues to fall. Should I convert some (or all ) of my money into Euros now to save myself from the falling dollar? If not, how much extra should I set aside to protect myself if the dollar does go lower? Thanks. Andy, Minneapolis MN

PS: I have the plane ticket already so rising oil prices shouldn't hurt me in that regard.

Answer: I'm jealous. A trip to Europe at your age is an adventure. Okay, it's an adventure at any age.

I find it fascinating that travel from the U.S to Europe remains strong despite the low value of the dollar and the high value of the Euro. What I've been told by industry insiders is that one tactic people are using to keep costs in line is to prepay as much of their big ticket expenses as possible, such as travel and hotels. Another expense you might want to prepay is Eurail pass early (assuming your going to be traveling around Europe by rail and not just stay in one place).

I think your Mom is right to suggest converting some of your money into Euros. She might even consider buying you an insurance policy against the dollar going even lower by putting some of your trip money into a short-term certificate of deposit denominated in Euros. For instance, Everbank offers CDs in Euros.

03/26/08 by Chris Farrell

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