A Run on The Dollar
Have you ever noticed that the world is coming to an end? It is – I can prove it just by opening my mail. I’ve got a flyer from a company here with big screaming headlines. “A Run On The Dollar!” it says. “U.S. Dollar … Virtually Worthless!”
I get this junk every single day, and I’ve concluded that there’s two ways to sell something to unsophisticated investors. You can either appeal to greed, or to fear. My totally unscientific conclusion is that fear is by far the more popular of the two options. Inflation scares, gold scares, interest rate scares – and now here’s this U.S. dollar scare. Sheesh. What’s an investor to do?
Well, let’s think clearly for a moment. Let’s say this ridiculous-looking flyer is right, and the U.S. dollar is about to crash. What would you do if you wanted to gain from that circumstance? Well, you’d buy international investments. If U.S. Dollars are cheaper, international stocks will benefit.
Ooh – but what if the dollar doesn’t crash, but does just fine instead? Well, the sensible thing in that case would be to be invested in domestic companies. That way, you can capitalize on the growth in the domestic market. But wait a minute, that’s the opposite of what to do if the dollar is going downhill. Which option should you pick?
Here’s an idea. Have a broadly-based, highly diversified, low-cost portfolio that’s invested in both domestic and international equities. If your portfolio contains 14,000 stocks from 21 different countries, it doesn’t matter which country has a bad year. If you add other investments that aren’t even affected by market forces, you’ve added another layer of defense to your portfolio. Does your portfolio have any non-correlated assets? How about assets that benefit from inflation but have nothing to do with the market?
Suggestions from the charlatans who write flyers like this one are different every day. My suggestions are consistent. I make these recommendations to clients day in and day out. Don’t be seduced by panic, and don’t let charlatans fatten themselves on your fear. Stay focused on a smart portfolio that is built for the long haul. Time is on your side.
Advice on Cats and Investing
“The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won’t sit upon a cold stove lid, either.” – Mark Twain
I like this quote a lot because it illustrates a peculiar habit of a lot of investors as they work with market based products. Someone comes into my office and says, “I definitely don’t want to own…”, and they’ll name some financial product. The reason why, inevitably, is that the investor had a bad experience with that product in the past. I get treated to a sad story about how much the investor lost in that particular investment. From that perspective, they feel totally justified in ruling out that kind of investment. They sat on a hot stove once, and now every stove of the same shape looks hot. (For another analogy, the same thing happens when a kid has a bad experience with some food item, and won’t eat it even as a grownup.)
This happens a good bit with cash value insurance. Cash value insurance is bad for investors in 90% of the cases I’ve seen, but for the other 10% of investors, this investment is actually a good idea. Medical professionals have some really good reasons for using life insurance as an investment, and it works really well for them. There are solid, logical reasons why this is the case. But most people reading this article are not in that situation – for such people, that stove will always be hot.
Here’s a key point: just because you had a bad experience with a particular product doesn’t mean that experience will repeat. Products change, technology changes. Your investing situation changes over time, and perhaps it has changed in a way that allows a previously bad investment to actually become a good one. When you are getting financial advice, it makes sense to avoid past mistakes. But that shouldn’t prevent you from keeping your eyes open to investment options that once produced results you didn’t like in the past. Just because an investment you made was a hot stove last time you touched it, don’t make the mistake of missing the opportunity to sit on a nice cool stove this time around.
I’ve tackled Roth conversions in other articles, but I want to address an aspect of Roth conversions that nobody else is really talking about. Here’s the punch line – if you’re a younger person considering a Roth Conversion, think twice before you pull the trigger! Here’s why.
If I were to convert my IRAs into a Roth today, that would be considered regular income. Now, I have school age kids, including a son who’s about ready to go to college. If I move a large IRA into a Roth conversion right now, that’s going to spike my income. Why does that concern me? Because there can be surprising consequences to a sudden increase in income. Colleges are going to look at my new, higher income, and might turn me down for college loans and grants that I could have been eligible for before the Roth conversion.
So if your financial advisor is talking to you about doing a Roth conversion, here’s a fun question to ask them: “Is it always right to do a Roth conversion?” If your advisor says yes, think carefully! I’ve just given you one situation in which a Roth conversion could have a serious negative impact on your financial picture. Like most things that get picked up in the popular media, Roth conversions get talked about as if everybody should be doing them. Never assume that financial moves that “everyone should do” necessarily apply to you. Do your homework first!
You should only make big financial moves with the aid of someone who knows your personal financial situation. There are many good financial ideas out there – including Roth conversions. But good ideas are just good ideas – they are not a mandate for you to make changes in your portfolio. By all means, take those ideas to a financial advisor who can tell you if this idea is right for you personally. I don’t want you to make a helpful long term move with a Roth conversion, while planting a ticking time bomb in your portfolio.