"The falling dollar by itself is really not a danger," says Jason Flurry, president of Legacy Partners Financial Group in Woodstock, Ga. "Currencies rise and fall all the time with very little effect on the average consumer. But it's one of those things that can bring an economy to its knees if left unchecked."
A weak dollar triggers a rise in prices that can boost inflation and reduce your purchasing power. If you're counting on $50,000 a year in today's dollars to cover expenses in retirement 20 years from now, you may find that you'll need closer to $75,000.
One way you can try to counteract the falling dollar effect is by investing in a well-diversified mutual fund or exchange-traded fund that specializes in international companies. Flurry advises conservative investors to put no more than 5 percent to 7 percent of their portfolio in overseas investments; while people who have a higher tolerance for risk might want to go as high as 20 percent.
Also consider foreign bond funds, foreign currencies in the form of CDs and money markets, and 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.
Don't be afraid of foreign investments
Overseas investments can help with more than just a falling dollar. Today's economy is global by every definition, and is becoming more so every year. Owning only American company stocks limits your portfolio's growth potential. Everyday we hear about China's booming economy. India isn't too far behind China, and many countries in Europe are experiencing re-invigorated economies.
Most mutual fund companies have funds that aim to profit from Asia, Europe and Latin America. But if that involves more risk than you're comfortable with, consider finding American companies that are benefiting from their overseas exposure. General Motors and General Electric are just two of the many companies that are taking advantage of the enormous Chinese market.
Diversification and a long-term approach -- ho-hum, but smart
It's one of those tidbits of advice that you hear repeatedly; have a diversified portfolio and let time work for you. Of course, a long-term approach may not be feasible if you're hoping to retire in five years and are scrambling to boost your nest egg, but for most people it's a tried and true approach.
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A diversified portfolio should include cash in a high-yield account, fixed income that can be held for a longer period of time in the form of bonds or longer-term CDs, and stocks or mutual funds. If you're in your 20s or 30s, you may want to skip the bonds and long-term fixed income. Instead, look for more growth-oriented investments.