You may not have noticed, but your net worth and income have been seriously squished over the past three years. From January 2002 to January 2005, the S&P 500 rose 4%, excluding dividends, but if you were in the S&P, you actually lost about 25%. The problem isn't your investment prowess. It's your currency.
The U.S. dollar has fallen about 30% against many major world currencies. Against the euro, it's down 33%. Against the yen, it's down 23%. Against the Swiss franc and Canadian dollar? Down 30% and 25%, respectively. So if your salary was unchanged over the past few years, you've actually taken a 30% pay cut on a worldwide scale. Ouch!
What's more, there are some really smart people who think that the dollar will continue to fall over the next few years. Warren Buffett's company, Berkshire Hathaway
Why the fall? In five years, America has gone from having a budget surplus to a budget deficit. Government debt and consumer debt are growing. The trade deficit is expanding -- the U.S. is buying more from other nations than other nations are buying from us. And interest rates are still low: People holding American dollars don't get a huge return each year, so they are more likely to sell them. All of these factors tend to push down the currency, and there's a decent chance that the fall will continue.
What to do
I suggest closing your eyes and going in your mind to your happy place, where nothing bad ever happens.
After you've done that, you might want to get greedy. After all, when markets move, there are ways investors can profit. In this case, you don't need to do anything complicated. Instead, you can just look for foreign stocks and companies that have revenue denominated in foreign currencies.
One simple way to do this is through exchange-traded funds (ETFs) that buy the stocks in a foreign index. This has the advantage of low fees, diversification, and relatively low volatility.
If you're interested in individual stocks, you can own foreign companies that have American Depositary Receipts (ADRs) that trade on U.S. exchanges just like normal stocks. ADRs are great because they give you exposure to overseas companies with assets and revenues denominated in foreign currencies. In U.S. dollar terms, these assets and revenues will increase in value as the dollar falls.
A third option is investing in U.S.-based multinationals with significant foreign revenues. If McDonald's
This sort of currency effect can lead to good returns. But as a member of the Inside Value team, I don't want to just profit from the currency, I also want to own companies whose shares are likely to significantly outperform. After all, if you can get both the fundamentals of the company and the fundamentals of the currency working for you, the returns can be impressive. Last year, one of my best-performing positions was an index fund, the iSharesMSCI Austria Index
This all raises the question of which foreign stocks look cheap now. I find the following stocks interesting.
It might not be sexy, but money can be made in these dominant companies with barriers to entry. Since Bill Mann recommended Cemex in the summer of 2003, it's up by about 70%.
One major risk with SK Telecom is that Korea's regulators are doing their best to weaken the company in the name of promoting competition. Consequently, they tend to make SK Telecom play by different rules than its competitors must follow. For instance, Korean regulators last year began letting consumers keep their phone numbers when changing mobile service providers. However, it didn't apply the rule to all providers simultaneously. Instead, it allowed SK Telecom's customers to transfer to other providers a full six months before the rules applied to its competitors. Thus, regulators effectively gave SK Telecom's competitors a six-month head start in poaching customers.
One challenge that Unilever faces is growth. Over the past few years, it has sold off non-core brands to focus on the brands with the most potential. However, the growth it was expecting last year failed to materialize, and that may account for its relatively low current valuation.
Recently, I talked with Philip Durell, the chief investment advisor for Inside Value, about the importance of currencies. His belief is that the falling dollar may be an issue over the next few years, and he's positioned the portfolio to take advantage of currency fluctuations by recommending two extremely cheap ADRs and several multinationals.
However, over longer time periods, he expects currency fluctuations to be less important, since such moves tend to cancel out and be relatively minor compared with the expected long-term outperformance of his picks. If you're interested in seeing which stocks he likes (and you should be, considering that he's beaten the market since the newsletter's inception), take a 30-day free trial to Inside Value.
Richard Gibbons, a member of the Inside Value team, has never visited Austria, but he still owns that Austrian index fund, as well as Unilever and SKM Telecom. The Motley Fool has a disclosure policy.