Persistence III – The Power of the Average Genius

by | Mar 24, 2015 | Archives

Now is the time to benefit from the power of the average genius.

Belief in dollar cycles and dollar cost averaging can make us average investors geniuses because we’ll be less against the dollar when it’s too high and more when the dollar is a good value.

dollar chart

Click on graph to enlarge.

Last Saturday’s Wall Street Journal article “Dollar Notches Biggest Weekly Loss Against Euro in Three Years” (1)  told how the greenback  had its biggest weekly loss against the Euro in three years.  The dollar was 1.5% weaker against the euro for the day and fell 3% over last week being its biggest loss since October 2011. The WSJ Dollar Index, which measures the dollar against a basket of currencies, ended the week 2.2% lower, the biggest weekly decline in percentage terms since October 2011.

According to the article, this was in part because “Investors’ confidence in the timing of higher U.S. interest rates ebbed”.

The fact that Japan and South Korea have expressed interest in joining the Chinese backed Asian Infrastructure Bank may have also had a negative emotional impact against the dollar.  The U.K., France, Germany, Italy and Australia have decided to participate in this regional bank and despite territorial and economic rivalry between China and its two neighbors, this bank is seen as a potential rival to the World Bank and Asian Development Bank, where the U.S. dollar holds greater sway.  See more on this at the Wall Street Journal article “Japan Says it Could Join China Led Development Bank” (3).

Despite this short term correction, I would not speculate on a falling dollar in the short term.

dollar chart

Click to enlarge.  See a link to the article with this dollar chart (4)

The chart above shows how the US dollar rises and falls in cycles, about six years up, then ten years down. The most recent upwards cycle began in 2010. If the trend continues, dollar investors have three more years to use the rising dollar to pick up assets, stocks, bonds, real estate at a discount because the greenback is strong.

Last week’s dollar weakness could indicate a trend change, but history suggests not.  There is good support for the idea that investors who speculate against the greenback, short term, right now, are likely to lose.

When do we see sudden short term shifts, up or down, as signs of a turn around in the dollar’s trend?

The answer is let’s don’t try to predict any market’s move short term.  Markets are moved short term by emotion and are not predictable.  Markets are moved long term by supply and demand and are predictable.

Develop a long term dollar strategy and stick with it.  The genius of averaging is that we never have to bet too much at any one time in the short term.  Averaging allows us to ignore volatility.  Averaging allows us to be a genius in the long term because we invest the least when prices are too high and we invest the most when prices are too low.

There are numerous ways to invest against the US dollar long term.

One approach is to average investments in the ENR Currency Sandwich Portfolio.  See details at enrasset.com or contact Thomas Fischer at Thomas@enrasset.com

Another way to average is with ETFs that hedge against a strong US dollar. These ETFs started in 2009 and have more than doubled their assets this year to $50.3 billion.  WisdomTree Investments for example offers the Wisdom Tree European Hedge ETF  (symbol HEDJ).  This ETF invests in European equities and hedges exposure to fluctuations between the value of the U.S. dollar and the euro.  This type of investments provides exposure to good value European investment but gives up potential forex gains when the USA dollar falls. The hedge factor also reduces diversification if you do not have other Euro holdings. Learn more at the Wall Street Journal article “Investors Embrace ETFs that Hedge Against a Strong Dollar” (5).

My approach is to average into 22 Good Value developed and emerging markets described in my latest report.

Whichever approach you take, create a long term strategy to invest in what your believe, based on something you know. The belief will encourage tenacity and averaging can reduce fears that come when you have to try and outguess the market short term.

See Persistence IV

Gary

See Three Trends that have come together to create a huge averaging opportunity now.

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(1)  Euro/US Dollar Chart www.finance.yahoo.com

(2)  Dollar Notches Biggest Weekly Loss Against Euro in Three Years

(3)  Japan Says it Could Join China Led Development Bank

(4)  Businessweek article on dollar cycles

(5)  Investors Embrace ETFs That Hedge Against a Strong Dollar

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