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The falling dollar, inflation and your retirement

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David Marotta of Marotta Asset Management Inc. in Charlottesville, Va., says currency fluctuations move in roughly 11-year cycles. The dollar has been tumbling since early 2002 with some minor reversals in 2004 and 2005. So, if we're in the midst of a typical cycle, we can expect the downward trend to continue for several more years.

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Marotta's company protects clients against the falling dollar by using six asset categories; three for stability and three for growth. "The three we use for stability are short money, U.S. bonds and foreign bonds," says Marotta. "So, on the stability side we put half of our bonds in U.S. bonds and the other half in unhedged foreign bonds.

"On the appreciation side we have three categories: U.S. stocks, foreign stocks and hard asset stocks. The U.S. stocks provide a little bit of hedging against the falling dollar, because when the dollar is worth less, it costs more to buy shares in a U.S. company. The foreign stocks are denominated in foreign currencies, and then you have a direct hedge against the falling dollar. We are very pro foreign investing. For most of our clients, we put half of their money in foreign stocks and half in U.S. stocks. If you were to invest in the way the world economy is you'd put two-thirds in foreign and one-third in U.S."

Marotta likes to invest in 12 foreign economies that the Heritage Foundation says have as much, or more, economic freedom as the U.S. They are: Hong Kong, Singapore, Australia, United Kingdom, Switzerland, Canada, the Netherlands, Belgium, Japan, Germany, Sweden and Austria.

Marotta calls the foreign markets incredibly important to a well-balanced portfolio that's positioned to overcome a falling dollar. He also notes the importance of emerging markets, which he says outperform foreign markets which outperform the U.S. market.

Marotta's asset allocation chart might help in balancing your portfolio. If your retirement portfolio is limited to a 401(k) with a dearth of options that has, say, one foreign fund, Marotta's suggestion would be to put half of your allocation into that one fund. That is in any market, he says, because foreign, on average, beats U.S.

Marotta's asset allocation chart
Marotta's asset allocation chart

Another important category for hedging against a falling dollar is hard assets such as oil, natural gas, real estate trusts, coal and water. They're hard assets because there are underlying assets that the company owns. Retail investors can add these to a portfolio through individual stocks, mutual funds or exchange traded funds.'s corrections policy -- Posted: Aug. 29, 2007
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