My impression of ForEx trading is that if one doesn't know what one is doing one can be taken out to lunch and eaten as the main course. I'm not a macro economist, but I'm still concerned about what a weaker USD means to an ordinary investor.
I own a few ADRs, one practical benefit is that the companies in question often transact their business in currencies other than dollars. Currency imbalances even out in the very short run. Suppose I have a dollar and a ruble and each one buys me a frozen pizza; meanwhile, on the forex market, I am told I can get a dollar for a ruble, or a ruble for a dollar.
Now fast forward 1 month, and the dollar still buys a frozen pizza but the ruble buys two frozen pizzas. The forex market hasn't caught on yet. I'm going to spend my ruble, buy two frozen pizzas, import them to the US and sell them for 2 dollars. Now I have 3 dollars. When I go to the forex market to convert them to rubles, I get 3 rubles. I convert that into 6 pizzas, import them to the US, and sell them for 6 dollars.
Pretty darn soon, the demand for rubles jacks up the exchange rate and this carry trade stops working. Trying to profit off the slim margins of inefficiency that the currency exchange markets allow is in my opinion a sucker's game because what you are really doing is making bets on how quickly or slowly the markets will correct away inefficency.
That is something that most people aren't well-informed enough to do. Thanks, ikkyu2, very helpful explanation. Speaking of pizza, Chris, I love Papa Johns. I own a number of companies that have ADRs. In general this seems like a good way to buy strong companies that are not in the US. Don't buy just for the ADR, but buy a good company at an attractive price and then if you get some currency boost, that is gravy.
Many of them seem to have small fees and taxes that get collected out of dividends. None of these are lethal, but they are there and if you own them in a tax advantaged account, you can't report them on income tax. Forex is highly leveraged and not for the faint of heart. I have been almost wiped out by a small move only to barely be saved from liquidation by a reversal in my favor.
Currency ETFs trade like stocks without the huge leverage but because currencies move very little day-to-day, so do these ETFs. But if you want a less risky way of trading currencies, I think that's the best option.
Investing in ADR's is quite a bit different than forex. Both can be fine investments, but they aren't substitutes for each other. You also probably have some decent currency diversification just with your US equity holdings. Many US companies do a significant amount of their business overseas.
If you want to diversify your cash exposure, look into ways to hold other currencies. Most of what's in this old blog is probably still relevant to ways of holding other currencies, some of the comments added other good info. Other than the planned end of QE2, I don't see anything on the horizon to stop the fall, but it has been a pretty dramatic move and might be ready to reverse for a bit. How's that for a useless opinion? This is another instance where I wish I could rec the comments.
Thanks for the helpful comment. Your experience confirms my impression of ForEx. Perhaps I should forget about currency altogether and buy more Depression glass. Antiques go in and out of demand. Right now that kind of collectible is dirt cheap.
I'll check it out when I have time. I will have to check where my multinationals do business. My current trades are I hedged my trades by buying Japanese Yen futures and US dollar futures. They don't perfectly hedge but I made the total positions as close to each other as possible so they hedge as much as possible. I'm holding for a long while. Only when they start changing interest rates do I unwind. I could make a lot more as my profit is made only from a 2 week movement.
If I hold for 1 year, I can only imagine what I'd be making, or losing. But that's what the hedge is for ;-. Thanks for the information. I certainly want to take advantage of the better interest rates on the AUD! I'm honored that my question would suggest an article topic. I know others are wondering how to invest with such a weak dollar. An Alternative to ForEx Trading? Report this comment 2 On April 26, at 3: Report this comment 3 On April 26, at 4: Report this comment 4 On April 26, at 5: Report this comment 5 On April 26, at 6: Report this comment 6 On April 26, at Report this comment 7 On April 27, at 9: Report this comment 8 On April 27, at Here is a list of currency ETFs.
Report this comment 10 On April 28, at 7: Report this comment 11 On April 28, at 1: But that's what the hedge is for ;- Report this comment 12 On April 28, at 4: Report this comment 13 On April 28, at 6: Report this comment 14 On April 29, at 7: Have a great weekend!
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