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My name is James Hartje, President & Founder of Stocks on Wall Street, an investment advisory company providing readers across the globe investment advice, stock picks, and market updates across our various online publications. Our main website is www.StocksonWallStreet.com You can follow... More
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  • Three of the Biggest Risks to Your Wealth Today 0 comments
    Nov 10, 2011 6:37 AM | about stocks: FXS, FXA, CYB

    Here are three of the biggest risks to your wealth today and how you can exert more control over each one and enjoy more of what’s yours.

    Risk #1:  Currency Fluctuation.  The U.S. dollar has taken a real beating this past year and is expected to stay down over the long term.  Having all of your assets in U.S. dollars (or any single currency) is not sound financial planning.  You don’t have a diversified portfolio if all your assets are in one currency.  By going offshore and holding portions of your assets in other currencies, you are truly diversifying and protecting yourself from the ups and downs of one currency.  Currency

    Investing in currencies on your own, without an ETF, can be difficult.  Most retail investors are better off with currency ETFs (exchange-traded funds) which track a single foreign currency or basket of currencies by using foreign cash deposits or futures contracts.  Currency ETF’s allow investors to speculate in the currency market without the risk of investing directly in currencies and without entering the forex market.  Some of the most popular currency ETFs are offered by Wisdom Tree Dreyfus, Rydex, PowerShares, Market Vector and Barclays.  But you need to do your homework before diving in.

    Risk #2:  Rising Taxes.  Beginning Jan. 1, 2013, all American citizens will experience significant tax increases, many in the form of hidden taxes and fees.  At the same time, U.S. citizens with foreign bank accounts may pay a withholding tax of 30% on transfers of funds to and from these accounts (a provision of the recently amended and little-known HIRE Act).  So, if you run your own business, it makes great sense right now to think about moving your business to a more tax-friendly environment offshore.  Or, you could stay in the U.S. and keep an account offshore where it is free of U.S. tax obligations.

    The key point is that, whatever you’re going to do, you should do it as soon as possible and well in advance of 2013.

    Risk #3:  Litigation. The U.S. is a litigious society; a new litigation suit is filed every 17 seconds.  This may or may not affect everybody.  But, if you’re a doctor, for example, or someone with a high profile who’s more susceptible to being sued, then you understand the increased risk.  In this case, the best solution is to protect your assets by moving them offshore.  Your offshore assets will be outside the realm of U.S. judgment and, therefore, far more difficult for creditors to get at.  This should not be confused with the fact that U.S. citizens and green card holders will continue to be taxed on their worldwide income, no matter where they reside or hold their assets.  Income tax is unavoidable other than legitimate tax reduction strategies.  However, you can minimize litigation risk to your assets by going offshore.

    Another risk people need to take into account is currency inflation. Having all of your assets in any single currency is not sound financial planning. You don’t have a diversified portfolio if all your assets are in one currency. Too many investors have all their assets in one single currency. This is especially true for Americans. Asian and European investors are more financially savvy when it comes to foreign currency investments.

    Investors have become increasingly skeptical about the long-term health of the world’s two major currencies, the dollar and the euro. Investors are flocking to alternative currencies, the most popular being the Swiss franc. But savvy investors are now looking beyond the eurozone.

    Investing directly in currencies can be difficult. Most retail investors are better off with currency ETFs (exchange-traded funds) that track a single foreign currency or basket of currencies. Currency ETF’s allow investors to speculate in the currency market without the risk of investing directly in currencies and without entering the confusing and volatile forex market.

    Here are three international currency ETFs worth considering for your currency portfolio. Some might even refer to them as relatively safe haven currency ETFs.

    WisdomTree Dreyfus Chinese Yuan Fund (CYB)

    Given China’s seemingly unstoppable economy, it’s currency could be a new safe haven option. China has by far the most forex reserves in the world and is fifth in gold reserves. Its economy goes from strength to strength. It’s no secret China’s currency is wildly undervalued by as much as 40%, suggesting a potential for huge gains. Given high inflation rates in China, the government may decide to adopt a more rapid appreciation of the yuan, which would further strengthen its status as a safe haven. Investing in China is not without risk and there are a number of potential snags, not the least of which is the general unpredictability of the Chinese government. In spite of repeated cries of a Chinese ‘bubble’ and the risk of near-term volatility, the long-term growth potential for the yuan appears strong.

    WisdomTree’s CYB seeks to achieve returns reflective of both money market rates in China available to foreign investors and changes in the value of the Chinese yuan relative to the U.S. dollar. The CYB fund has only gained 1.6% so far in 2011 and 4.4% over the past 3 years. Nevertheless, the prospect of a sharp appreciation in the Chinese yuan makes this an interesting option for investors looking to buy in for the long term. It is one of the most popular options for playing the Chinese yuan, having grown from less the $100 million in asset in 2009 to more than $660 million. Recent developments are likely to continue this trend.

    CurrencyShares Australian Dollar Trust (FXA)

    Australia benefits from vast exports of key commodities and a large number of Asian trading partners. It’s less vulnerable to an American/euro slowdown unlike other developed exported such as Norway. Australia has a low level of public debt and is a net exporter. Unlike Switzerland, which is surrounded by nations using a single, falling currency, Australia has a strong diversified mix of export partners so that a single currency crisis won’t bring the country down.

    The FXA from Rydex seeks to give investors exposure to movements of the Aussie dollar against the American dollar. The fund has gained 2.7% so far in 2011 and has delivered impressive returns over the long term, gaining 38.2% over the past 3 years and 66.2% over the past 5 years.

    CurrencyShares Swedish Krona Trust (FXS)

    Sweden is rate "AAA" by all 3 of the major rating agencies. It has a modest public debt level that’s 35% of GDP, strong forex reserves and its top export partners aren’t dominated by eurozone economies. The krona is one of the few safe spots left for European-focused investors.

    The Rydex FXS fund is the best way to play the krona, giving investors exposure to the movements of the Swedish currency against the U.S. dollar. The FXS has gained 2.1% so far this year and nearly 11.1% over the past year.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: FXS, FXA, CYB
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