I’ve seen a lot of pro-America slogans come and go: “Buy American” … “Keep America Rolling” … “Look for the ‘Made in USA’ label.” They’ve all attempted to tap into our patriotic spirit, encouraging us to buy American products.
I think the sloganeers’ hearts and minds are in the right place. I was born and raised in Florida, and have nothing but the best hopes and dreams for my country.
But investing is a whole different ball game. It’s more about making money and less about emotions. That’s why when it comes to socking away your fixed income money, I just don’t think “Buy American” is always the best prescription.
In fact, today I’m going to tell you why, when it comes to bonds, you might be better off buying anything but American!
Before we go any further, let me be clear: I still like short-term U.S. Treasuries and Treasury-only money funds as a place for your “keep-safe” funds.
However, I think foreign bonds (and, thus, foreign bond funds) could be on the verge of vastly outperforming their domestic counterparts. Blame (or thank, depending on your perspective) the U.S. dollar. Let me explain …
Bonds With Decent Yields,
Plus a Currency Kicker
Many investors don’t know much about bonds. And, unfortunately, they know even less about foreign bonds — fixed-income securities denominated in a foreign currency like euros, Japanese yen, or British pounds.
For money you can afford to risk in pursuit of higher gains, I think these investments are pretty darn attractive. That’s especially true now that the greenback is on the ropes. [Editor’s note: For more on the falling dollar, see “Falling dollar … what to do!”]
You see, when the dollar drops, the value of foreign bonds held by U.S. investors rises … even if foreign bond yields and prices remain unchanged. The idea of making money while your investments go nowhere might sound crazy, but it can happen.
Here’s how it works:
Let’s say you wanted to buy $100,000 worth of 10-year European debt paying 5% a year in interest.
To keep our example simple, we’ll say that when you buy these euro-based notes, one dollar is equal to one euro. (As recently as the beginning of 2003, this was the case).
If bond prices remain stable, your investment will be worth about 120,000 euros four years later.
Assuming that the euro/dollar exchange rate is still even, you could cash in your bonds and convert the proceeds back into about $120,000 (minus some miscellaneous currency conversion fees and charges).
But what if the dollar slumped in value during your holding period … so much so that each euro was now worth $1.30. (That’s roughly the actual exchange rate today.)
In this scenario, selling your 120,000-euro investment, and converting the proceeds back into dollars, would get you $156,000 ($1.30 X 120,000 euros)!
Your total return would be more than 56% in dollar terms vs. a little more than 20% if the dollar/euro exchange rate remained flat.
Needless to say, it’s a two-way street. You can also lose money if the dollar rises substantially while you’re holding foreign bonds. And there are still the same risks that apply to all bonds, such as the negative effects that rising inflation or interest rates can have on prices.
But I think the example shows why foreign bonds can be a great play. They don’t just pay decent yields, they can also deliver a nice “kick” in the form of currency-related gains. No U.S. Treasury can give a domestic investor that same combination.
So, does this work in the real world?
Yes! You Really Can Get Double-Digit
Returns From Low-Risk Debt …
Take one relatively conservative income fund we’ve been recommending in Safe Money Report. It invests in mostly short-term, foreign government debt, not high-risk corporate and “junk” bonds. The fund was recently up more than 10% year-to-date!
Of course, that fund also owns a small helping of gold shares. But even if you don’t want to own a stake in the miners, there are plenty of other choices out there.
For example, another foreign bond fund I’ve been watching invests strictly in intermediate-term government and relatively low risk corporate debt. It’s returned more than 9% so far this year.
As you can see, sometimes it pays to buy Belgian … French … or German (that fund I’m watching owns bonds from all three of these countries).
Now, it wouldn’t be fair to our paying subscribers if I gave you the specific fund names, our buy and sell points, etc. I’m sure you understand.
But I can tell you how to start finding your own favorites … for free!
To learn more about how foreign bond funds work, and to see how the category as a whole is performing, follow these steps:
- Go to Morningstar.com
- Click on “Funds” in the upper navigation bar.
- On the right-hand side of the main screen, you’ll see a section called “Morningstar Tools.” Click on “Mutual Fund Screener.”
- Once you’re in the screener, select the “World Bond” category in the second drop-down list (called “Morningstar Category”).
- At this point, you can either add additional criteria (such as expense ratios, Morningstar rankings, or the quality of bonds in the fund’s portfolio).
- Once you get the results of your screen, you can start investigating further.
And remember, the main lesson is this: The dollar’s decline can be a blessing in disguise. You just have to know how to make the most of it. Once you’ve made a bunch of money, you can use the proceeds to buy all the American goods and services you want!
Until next time,
Mike
P.S. If you’re interested in learning more about the specific funds I mentioned in this column, along with some of my other investment ideas, you can get them in Safe Money Report. We’d love to have you on board!
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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