Worried About the U.S. Dollar? You May Already Own a Better Hedge Than Gold
With headlines about rising U.S. debt, inflation, government spending and the future of the dollar, it's understandable that investors are asking:
Should I own gold?
It's a reasonable question. But it may be the wrong place to start.
The better question is: Do we really need to predict what happens next in order to prepare for it?
Be a Historian, Not a Detective
When it comes to investing, I believe we should spend more time being historians and less time being detectives.
The detective searches for clues:
What will happen to the dollar?
Where is inflation headed?
What will the Federal Reserve do?
Will gold continue to rise?
Which country or market will outperform next?
There's nothing wrong with asking these questions. The problem comes when we begin investing based upon our answers.
Because now we're predicting.
The historian approaches investing differently.
We have decades of evidence showing that markets have been remarkably resilient through recessions, wars, inflation, political upheaval and financial crises. We know equities have historically rewarded investors for accepting greater risk over long periods. We know diversification works because countries, companies and asset classes don't all behave the same way at the same time.
And history repeatedly teaches us something else:
Predicting markets, currencies, inflation and world events consistently is extraordinarily difficult.
Being a historian isn't only a more evidence-based way to invest.
It's a more peaceful way to live.
What If the Dollar Really Does Decline?
This is where international diversification becomes particularly interesting.
When an American investor owns an unhedged international stock, that investor owns both a foreign business and exposure to its local currency.
Here's a simple example.
Suppose you own €100 worth of a European company when one euro equals one dollar. Your investment is worth $100.
Now suppose the company doesn't change in value, but the dollar weakens and one euro becomes worth $1.20.
Your €100 investment is now worth $120 in U.S. dollars.
You just received protection against a declining dollar without having to predict that the decline was coming.
That's an often-overlooked benefit of global diversification.
So Why Not Just Buy Gold?
Gold can certainly perform well during periods of dollar weakness, inflation fears or geopolitical uncertainty.
But gold is fundamentally different from owning productive assets.
Gold doesn't produce earnings. It doesn't pay dividends or interest. It doesn't manufacture anything or provide a service. Its future return largely depends upon what another investor is willing to pay for it.
And despite its reputation, gold hasn't been a consistently reliable hedge against inflation, currency movements or geopolitical events.
A globally diversified portfolio takes a different approach.
Rather than making a concentrated bet on one commodity because we're worried about one particular outcome, we can own thousands of productive businesses across countries, economies and currencies.
Don't Replace One Concentration With Another Bet
Think about how much of an American investor's financial life may already depend upon the United States.
Our income may come from a U.S. employer. Our home is here. Our cash is in dollars. Social Security and pensions may be paid in dollars. And many investors hold portfolios heavily concentrated in U.S. stocks and bonds.
That's a lot riding on one country and one currency.
If we're concerned about that concentration, the answer doesn't necessarily have to be another concentrated bet—this time on gold.
Diversification gives us another choice.
If the dollar weakens, foreign currency exposure can help.
If U.S. stocks struggle, we own companies elsewhere.
If America continues to prosper, we participate in that too.
If another country struggles, we don't own only that country either.
We don't have to determine the winner beforehand.
The Freedom of Not Knowing
This may be the most important lesson.
Good investing doesn't require us to correctly predict the next president, recession, war, interest-rate move, currency crisis or market winner.
It requires something much harder:
Accepting that we don't know.
That's why diversification is so powerful.
We don't diversify because we know what will happen. We diversify because we don't.
So the next time a frightening headline makes you feel like you need to change your investment strategy, ask yourself a simple question:
Am I being a historian—or have I become a detective?
History doesn't tell us exactly what will happen tomorrow.
But it gives us evidence for how to prepare for a tomorrow we cannot predict.
And that may be a much better hedge than gold.