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The Dollar's Decline Drives Home a Diversification Lesson

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A week ago, I bought a cup of coffee in Zurich. It was a familiar experience for American travelers in Europe, where portion sizes are far more modest than in our own bounteous country. When a family member accidentally knocked the coffee down, I bought a second cup. It was then that I paid close attention to the cost. These two cups of coffee together would barely fill half a cup in the U.S., yet together they set me back close to $11.00!

I only stopped in Zurich on the way back from Jerusalem. On six previous trips to Israel, I recall how eager people were for dollars. They trusted the greenback more than their own shekel; it was a model of stability and strength. My dollars and I didn’t stand quite so tall this time. The exchange rate was the lowest in my memory, and I made the mistake of not converting all the money I wanted at the beginning of my trip; the dollar’s value continued to plunge rather precipitously during my stay.

My last time in Switzerland, I was able to buy roughly two Swiss francs for each dollar. This time, a dollar wasn’t worth even one Swiss franc. I used to buy four or even five shekels for each dollar; this time it was 3.4.

The plunging dollar is not just an interesting graph in the newspaper. That dollar is you. When you pay $2 for lodging and order a seven-course meal for a trivial sum, as I once did in Hungary in the late 1980s, you feel like a million dollars — even if you’re just a poor college student. When you’re watching every shekel, even in your mid-40s, you don’t feel quite as prosperous.

U.S. economic policymakers have brought us down. In particular, excessive public spending has put a crimp on private spending. And it may be a long time yet before we get our fiscal and monetary house in order. Until then, Americans, and advisors on behalf of their clients, must hedge against this decline in our world economic position.

One way to do that is to own gold or silver. The recent rout in metals could be construed as a warning against ownership of commodities that pay no interest or dividends and create no value. Alternately, it could be seen as a buying opportunity. Another popular approach is to buy foreign currencies. The many inputs — economic and political — that fuel forex trading make this an enterprise few should attempt, aside from the fact that currencies do not create value any more than commodities.

The best solution is foreign stocks, and most Americans should increase their allocation to this area. Had I been a shareholder in Nestle (NSRGY), that $11 sip of Nescafe might have tasted a little less like hemlock.