Saturday, October 24, 2009

Kicking things off and the dollar's decline

Every nerd needs a blog.  Especially when you can archive interesting things and keep them for reference!

Regardless of how one feels about the dollar's decline in value against other currencies, there are always ways to make money off what happens.  Most people I've heard with opinions on this seem to think they should switch into bonds, thinking the stock market will inevitably tank from mismanagement.  Either that or they switch into commodities, the holy grail of hedging against inflation.

The real answer, and the one nobody wants to hear, is that there isn't a way to predict this very well.  Strategic management involves being prepared for all things, rather than placing big bets on short term moves.

So how does one prepare for inflation, deflation, robust growth, and a W shaped recovery?

Inflation:  commodities, domestic exporting companies (if your currency flows down, your exports go up because they're cheaper for international markets.  See Japan since the mid 70s.), and international equity/debt (especially emerging markets).  Avoiding import-centric companies, fixed rate long term debt, and short term debt of all kinds.

Deflation: fixed rate long term debt, international equity (developed only, not EM),  short term securities, and import-centric equity.  Specifically avoiding emerging markets of all kinds, commodities.

Robust growth: equity.  all kinds of it.  Avoiding short term debt, newly issued long term debt (if interest rates are low, you might get a discount for high interest long term debt already issued).  avoiding short term securities, you'd be on the sidelines of great chances to make money.

W shaped recovery: Almost nothing but a balanced portfolio.  Investing in everything, not equally, but enough to straddle prices in both directions.

So what is the net effect?  Find a strategy that fits your risk profile.  Stick with it.  Don't try to time the market.  And diversify among all sorts of things.

People hate that kind of advice...

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