Building an International Portfolio for Diversification

Finally, when building an international portfolio you should include an adequate currency diversification. In this case, the investor also assumes the area or country risk (o the rest of the countries where investors are performed), the devaluation possibility in the rest of the currencies before the American dollar, which is the currency used as the worldwide benchmark; however, there could also be the case of the US dollar devaluation before other currencies, situation which would be positive for the portfolio (when dollarizing every investment).

When an American dollar devaluation before other currencies happens, as during this site’s preparation, when dollarizing the portfolio’s annual result (since our investment portfolio is denominated in US dollars), profitability increases just by trading results gained in other currencies for American dollars.

For example, a portfolio invested during the beginning of the year at fixed rent (bonds) in American dollar, Euros and yens, have gained not only bond interests during the year, but also have benefits with these currencies’ before the American dollar.

Currently, a negative correlation is happening between the American dollar, the Euro and the Japanese yen, while these last two currencies present a positive correlation between them and gold (since the international gold price is negotiated in dollars, a devaluation in this currency results in a cheaper gold price, if purchased with Euros, yens or other currencies different from the American dollar).

Usually currency fluctuations in the more developed countries are a response to the monetary policy and economic situation of these countries or areas (in the case of the Euro in Europe), unlike the American currency behaviors which – except in the case of the Chilean peso – are much more sensitive before the American dollar… although we have been releasing from that currency and are betting for globalization.

Within international diversification, we should consider a low correlation amongst the types of assets; for example, when investing in a commodity future or real estate, we trade on real assets, while a bond or stock investment is more a monetary investment; the forwards and bonds have an opposite response before the inflation effects in a same currency and therefore have a negative correlation amongst them; that is precisely what we should try to achieve.

In case an investor is not feeling secure enough to invest on their own in types of assets which are unfamiliar (or in which they’re not experienced enough), there are specific indexes and specialized mutual funds, as for example, in commodity investments, the most important and renowned index in the United States is the Commodity Research Bureau (CRB). The CRB is a passive index that negotiates in the “NY Futures Exchange” and is made from 21 types of commodities.

Real estate funds are even more common and exist in every large city in the planet; they exist as a part of a fund which in turn is the owner of physical assets as funds that invest in real estate fund stocks.