Unfortunately there are no longer any truly conservative U.S. dollar denominated investments. That is because the U.S. dollar, the currency in which such investments are denominated, will conserve little in terms of its long-term global purchasing power.
The most important aspect of determining which investments qualify as being conservative is to first determine exactly what one is attempting to “conserve.??? If one’s goal is simply to conserve the number of dollars one owns, then there are several domestic investments that will satisfy that simple criteria. However, what good is it to conserve dollars, if the dollars themselves do not conserve their purchasing power? After all, we do not want dollars for their intrinsic value; we want them for the goods and services they can buy. However, based on current U.S. monetary and fiscal policy, the many structural imbalances underlying the U.S. economy, and the potential monetization of massive funded and unfunded federal liabilities, the purchasing power of the dollar is likely to diminish substantially over time. Therefore, conservative investors need to ask themselves one very important question. What exactly am I trying to conserve?
I have asked and answered that question for myself, and have helped thousands of my clients to answer it as well. What we all really want to conserve is our purchasing power. At one time, when the dollar was sound, and Americans produced the goods they consumed, this goal was readily accomplished with certain types of dollar-based investments. However, like the song says; “The times they are a changing.??? Anyone wishing to truly be a conservative investor must be prepared to change with them.
If purchasing power is your goal, the investments that can best preserve it can only be found beyond American borders. However, most stocks are not conservative, and neither are most currencies. The challenge is to choose the currencies that are most likely to conserve their purchasing power, based on objective economic and political criteria, and then to invest in conservative stocks denominated in those currencies — those that might be thought of as being for “widows and orphans??? for citizens of the countries in which they are domiciled.
Anyone accepting the premise that the dollar will lose a substantial percentage of its purchasing power will naturally develop an investment portfolio disproportionably comprised of foreign stocks. Remember, former Fed Chairman Paul Volcker was recently quoted as predicting an 80% probability that the U.S. dollar will collapse within the next five years (a relatively short time horizon in the investment world) Conservative investors who take the former Fed Chairman’s warning seriously, have no choice but to seek safety abroad.
However, if well diversified in both assets and countries, such a portfolio is no more overly concentrated in foreign currency than is a well diverse portfolio of domestic securities overly concentrated in dollars. The fact that such a portfolio might occasionally fall in value during temporary periods of dollar strength is the trade-off for its ability to rise in value during much more prolonged and pronounced periods of dollar weakness.