Copyright 2013 John T. Reed
I have recommended that you put your rainy-day savings in AUD,CAD, CHF, and NZD currencies in foreign savings accounts. I have followed my own advice in that regard.
All financial portfolios need to have a percent allocation for each asset decided. That, in turn, implies monitoring and rebalance.
Because asset values change over time, you must periodically look at what percentage you have in each asset to see if it is the percentage you decided upon.
If it is less than what you decided, you buy more of it to rebalance it to the desired percentage. That happens when the value of the asset falls as has happened recently with the four currencies I recommend.
If it is more than what you decided, you sell some of it to rebalance it to the desired percentage. That happens when the value of the assets rises as has happened recently in the U.S. stock market.
This is counterintuitive to many. Why buy more of something when it falls in value? Because it is cheaper. And because if you do not rebalance, you let the markets change your asset allocation. The longer you allow that to go on, the more out of whack it will get.
Why sell a “winner?” Because it is less attractive to buy or hold when it costs more when there has been no corresponding improvement in its fundamentals. Gold, for example, has had an average value of $642 2011 USD since 1968. At, say, $1,400 it is less attractive to buy or hold than it was at $1,300. Plus it is not a bargain until it falls below $642 2011 dollars. Rebalancing a portfolio containing gold (I do not recommend gold at all) would cause you to lose less money when it inevitably regresses towards its historical mean value.
For example, if you had failed to rebalance during the late 1990s and you owned NASDAQ stocks, you would have lost more money when it crashed in April 2000. If you had rebalanced, you would have lost less. The more frequently you had rebalanced, the less you would have lost.
You see, the NASDAQ market went nuts in the late 1990s valuing new dot-com companies with no income or with nothing but losses at extremely high multiples of who knows what—certainly not earnings. If you do not rebalance, the percentage of your portfolio that is in NASDAQ stocks becomes higher then much higher than you thought prudent when you made your asset category allocation decisions. The reason you did not originally want it that high is probably that you felt NASDAQ was too risky to have that much of your net worth. Wise choice. But if you did not rebalance as the NASDAQ went irrationally exuberant, you were letting the crazy mob change the distribution of your portfolio in favor of greater risk.
Similarly, now, if you do not rebalance to keep your foreign currency portfolio at the percentage you chose, you are letting some unknown USD bulls and AUD/CAD/CHF/NZD bears decide your USD hyperinflation risk exposure. To hell with that.
Remember percentage of your net worth is the number you want to keep constant, not the USD amount you originally invested. If all your assets fell about the same, no rebalancing is necessary to keep the percentages of your net worth the same. Rebalancing is necessary when some of your assets rise or fall and others do not do the same.
Rebalancing is standard, universal, financial-planner advice that has been around forever and relates to management of all investment risks not just hyperinflation.
John T. Reed