My last post addressed the concerns investors had about the dollar potentially losing its status as a reserve currency. Today, we’ll take a look at what actions you might consider taking if that was a risk about which you are concerned.
First, you could increase your allocation to international equities. For example, in the case of my firm Buckingham, our model portfolios, which we use as a starting point for discussions with clients, includes a 40 percent allocation to international equities, of which 30 percent is allocated to developed markets and 10 percent to emerging markets (the 3:1 ratio of developed to emerging markets is in line with their relative shares of the global equity market). U.S. stocks currently constitute less than 50 percent of the global market capitalization. However, some home country bias can be justified because international investing is a bit more expensive (both in terms of fund expense ratios and trading costs), hence the 60 percent domestic allocation with which we begin conversations.
With that said, if you are concerned about the value of the dollar falling, you could increase your international allocation from 40 to 50 percent, or perhaps even 60 percent (which would be more in line with the current market capitalization). It’s important to note that the mutual funds you use shouldn’t be hedging the currency risk (as for example Tweedy Browne does in their international funds), as it’s a risk you want to have.
Read the rest of the article on the Seeking Alpha website.