I have read with great interest several diaries regarding the likely impending financial crisis our nation is facing. The rethugs policy of obscene credit card spending (or the "Baby Tax" as someone else put it) almost ensures that some form of a catastrophic economic scenario will transpire.
While we all wish that the situation were better,(like when we had competent Democrats running things instead) we must face the present reality and struggle through as best we can.
Judging by the questions and advise that has been written on this topic thus far, I sense that a lot of folks have many questions as to what their options are when it comes to financial matters and a 'tin foil hat' scenario. Since many of the options have not yet been mentioned or properly 'qualified' previously, I thought I would throw in my 2 1/2 cents.
First, a disclaimer: nothing in this post should be construed as investment advise. I am NOT a CPA, broker, financial adviser, etc. I am simply offering my opinion on the subject. Please consult a financial adviser prior to making any new investments or changes to your asset allocations.
Ok, here goes...I will address this topic with a questions and my opinion as a response.
Q - When trying to prepare for a possible financial meltdown why do so many people talk about buying foreign currencies? If I wanted to, how would I go about buying a foreign currency?
- The US Dollar (commonly abbreviated as USD) is the defacto most used global currency, due in no small part to the fact that most oil is valued in USDs. In the past couple of years other major currencies have made substantial gains against the USD. If this trend continues, a USD dollar converted to another currency like say the EURO (EUR) could later be converted back the USD for a gain. Some credible currency experts are expecting a continuing decline of the USD of 20% or maybe more if things go into crisis mode. Assuming that the currency you choose to convert into remains stable (and this is by no means a given) you could shelter these funds from further USD devaluation.
-As to aquiring foreign currency, it is easy to be confused because there is so much disinformation out there. I will try to add some clarity:
- FOREX or FX or Foreign Exchange - Some people make money (but many more people lose money) by exchanging leveraged and/or large amounts of currency. This is NOT a good idea for most people. You really need to know what you are doing to operate successfully in most FOREX environments. Even understanding the fees (which are often hidden) can be confusing.
- Foreign Banks with brick buildings - Let's say you are visiting a country and you wish to invest in their currency. You can stop into a local bank and inquire as to their policies for opening an account, as a resident of another country. Often times you can get an ATM card which will allow you to deposit and/or withdraw funds when you get back home. But if you seek to do this, make sure there ATMs near your home that will work with their institution, and if so what the fees (if any) are. Also be sure to ask what the conversion rate is for such transactions (you should ALWAYS ask this question no matter what)
- US Bank with Foreign Currency Accounts/CDs - There is at least one US Internet bank that offers foreign currency accounts and CDs, and the name of it is EverBank.Com There may be others as well. They charge .75% to convert in each direction so keep that in mind. But some of the 3 month CD rates are great like the Australian dollar (today 3.29%APR) These accounts are FDIC insured (but of course this does NOT cover currency differentials to the USD or other currencies)
- Brokers that allow currency conversion (many DO NOT) - While technically, this is a form of FOREX that I warned you about above, there is a BIG distinction to be made with converting actual USD to some other Currency like the EURO and then just holding on to the converted currency. This is less risky then a leveraged transaction because you still have currency, not some margin or loan that could get you in trouble. Unlike Everbank, you can set a limit price to buy your currency, and some discount brokers will give you a good deal on the pricing. For example, InteractiveBrokers.Com charges USD $2.95 to convert up to $25,000. By contrast, converting $25,000 at Everbank this would cost about $187.50. Other fees may apply depending on the broker. For example, if you only use InteractiveBrokers.com for FX there are no extra fees, but if you trade stocks you will need a Market Data Subscription which is $10.00 a month. However, since they only charge $1.00 to buy/sell 100 shares this can still be a GREAT deal!
And here is a great tip that could save you a bundle; Once you have purchased the currency of your choice, you could wire it from your broker to say Everbank in EUROs or whatever without incurring additional conversion costs. Just be sure to check with both institutions before hand and tell them that you want to wire money in whatever currency direct without converting it. Also be sure to ask what the wire fees in/out would be.
- Brokers that allow Futures in Foreign Currency (many do not) - Just like FX, this is only for experienced traders who REALLY know what they are doing. Futures are highly leveraged instruments that have the potential to earn or lose a person a great deal of money. Some of the more commonly traded Futures are mentioned here.
Mutual funds and ETFs that invest in Foreign Markets - This is perhaps the most widely available form of investing in non-US currency because many 401ks where folks keep much of their money simply don't offer much else along these lines. While this is not the same as buying currency, you are purchasing stocks and/or bonds that are valued in another currency. Take a look at the chart below for a dramatic illustration of this:
What you are looking at is an Exchange Traded Fund or ETF of the ticker symbol IEV (Known as iShares S&P Europe 350 Index Fund) vrs. the US S&P 500. Notice how they started to diverge as the USD went into the toilet. Certainly other factors were at play as well, but USD currency devaluation vrs. the EURO is part of the reason for the relative under performance of the S&P 500 as compared to the S&P Europe 350 in this example.
I hope this brief description helps to clear the air for some of the inquiring minds out there! If there is sufficient interest, I will write more, like on the subject of gold perhaps...