Dec 172013

There’s a common misconception that cash is somehow a safe asset. People who have lost money investing in the financial markets may believe stocks are risky, and cash is safe. But what if I told you that not all cash is created equal 😎

Iceland was hit even harder by the 2008 financial crisis than the U.S. and it’s 3 major banks went bankrupt. Global investors slowly lost confidence in Iceland’s economy and therefore, the value of its currency was called into question. Before the credit crisis each Icelandic Krona was valued at roughly 1.5 cents U.S. But after 2008, the Krona was only worth 0.75 cents U.S.  This effectively cuts the purchasing power of the Krona, and anyone who had it, by 50%. Imagine if you lost half your savings 🙁 So much for cash being a safe haven 😕  13-12-kronacurrency

Hungary’s currency lost almost its entire value after WWII. And even Germany, the economic engine that’s driving Europe today, once experienced a currency devaluation itself in the 1920s and was forced to create a brand new currency because it’s old German Marks had literally become worthless. No country, regardless of its global reputation today, is immune to currency risk. Smart investors know this 😉 So if cash isn’t risk free, what can we do? The answer is simple. We all know diversification reduces risk. We diversify stocks by buying different companies. So similarly we can diversify “cash” by investing in foreign currencies (^_-)

The equivalent of $4 trillion USD is traded in the foreign exchange market everyday, which is much more than the global stock or bond markets. Currency hedging is already an important investment strategy for many rich households, and ordinary people like you or I can take advantage of it as well 😀 Today’s post explains how.

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