Protecting against USD devaluation.

October 16, 2009 6:26 AM

Good ways for a US citizen to protect their long-term savings against US dollar devaluation?

Bailed on the S&P 500 index September 16, 2008. Currently parked in US dollar-denominated money markets and treasury funds. Concerned about inflation and/or devaluation.

posted by ZenMasterThis to work & money (10 comments total)

Neither money markets nor treasuries will give you a return above the rate of inflation. If you want a return above the rate of inflation you need to take on more risk, namely equities and/or investment-grade corporate bonds.

As to your concern about dollar devaluation: what's your exposure to foreign currencies? If all of your assets are denominated in USD, all your income generated in USD, and all your business conducted in USD, I wouldn't worry too much about its valuation in relation to other currencies.
posted by dfriedman at 6:38 AM on October 16 [1 favorite]

If you are a US citizen, living in the US you don't have to worry about devaluation directly: you earn income and pay expenses in USD, it doesn't matter for most purposes how many euro a dollar buys.

There is a second order effect in the effect of dollar devaluation on inflation, which you also expressed concern about. A decrease in the value of the dollar on foreign exchange markets would be associated with higher inflation in the US. This is a trickier problem, but if you are really just concerned about inflation you could do worse than buying two year TIPS and hoping that the economic climate is clearer two years hence, you would know you will get your money back in real terms and only lose opportunity cost.
posted by shothotbot at 6:40 AM on October 16

TIPS (Treasury Inflation-Protected Securities). A bit simpler option is a mutual fund that buys them, like the Vanguard Inflation-Protected Securities Fund (VIPSX).

Keep in mind that these are extremely conservative investments and may not be right for you as an investor.
posted by smackfu at 6:41 AM on October 16

Note that the returns on TIPS only promise to match the rate of inflation, not exceed it. Due to the beneficial effects of compounding over time, this means that you miss out on a lot of potential increases in your return. The fundamental point to remember is that there is a tradeoff between risk and return. The less risk you take on the lower your potential return. The more risk you take on, the higher your potential return. Of course, the more risk you take on, the higher your potential losses as well.
posted by dfriedman at 7:21 AM on October 16

Series I savings bonds provide a (small) amount of real interest, in addition to protecting against inflation (as measured by the CPI). They offer rates a bit higher than TIPS, I believe, but you can only buy $10k of them a year.

Also, if you don't trust CPI as a measure of actual 'felt' inflation (some people don't think its representative of many Americans' spending patterns, especially people in retirement for whom healthcare is a major expense) then you could still get hurt by price fluctuations. It's not a panacea.

You can buy $5k of them electronically via TreasuryDirect, and another $5k in paper via just about any decent bank; just go in and ask for a savings bond order form.
posted by Kadin2048 at 7:31 AM on October 16

Actually, I Bonds bought right now have a 0.00% fixed portion, so they provide no real interest above the variable inflation rate. That may change on Oct. 31st when the Treasury sets the next periods rates.
posted by smackfu at 8:08 AM on October 16

Another thing to think of are municipal bonds. But here you need to tread carefully. Some muni bonds, such as those issued by California, are near junk bond status in terms of their credit rating. Of course some munis are less risky. But the municipal bond market is very complex, so if you have no experience in it it may not be a viable option.
posted by dfriedman at 8:41 AM on October 16

As pointed out by dfreidman, if everything in your life revolves around USD, then you shouldn't need to worry much about USD devaluation wrt other currencies. Instead, you will want to hedge against runaway inflation. In this scenario, your safest bet is to invest in inflation protected treasury bills(TIPS).

Best wishes!
posted by jchaw at 10:08 AM on October 16 [1 favorite]

Choose a foreign currency and buy saving bonds denominated in that currency. As others have said, you only need to hedge if you're conducting transactions in multiple currencies. Buy some Canadian savings bonds, Euro bonds, whatever.
posted by GuyZero at 10:42 AM on October 16

Choose a foreign currency and buy saving bonds denominated in that currency. As others have said, you only need to hedge if you're conducting transactions in multiple currencies. Buy some Canadian savings bonds, Euro bonds, whatever.

This is precisely wrong. If the OP is a US citizen living in the US and he buys a Euro denominated bond he is exposed to the the change in the rate of the USD vs the Euro. That may be good for him or it may be bad, but it is a risk he is taking because he is exactly taking his big pile of US dollars, trading them in for euros, buying a euro bond and then when the bond matures trading the resulting increased pile of euros back into dollars. You may think its a sure thing that the dollar is going to depreciate against the euro over the next five years, but its a really, really hard question to answer.
posted by shothotbot at 12:29 PM on October 16