Question: I'm wondering how the weak dollar affects one's investments and savings.

J.A. Markson

Answer:

Dear J.A.,

The falling dollar does a number of things, in addition to making it expensive to vacation in many foreign countries.

Five points to keep in mind

(1) The weak dollar makes imports from other countries more expensive for Americans. In some cases, this results in our purchasing more American-made products and services.

(2) The weak dollar often raises the price of raw materials used to produce manufactured goods, thus contributing to inflation.

(3) This in term sometimes causes the Fed to raise short-term interest rates, in order to keep inflation in check. Some experts are predicting that by the end of the year, yields on our 10-year Treasuries could reach 5%. Don't take this as a given, however. It's just a prediction.

(4) The weak dollar makes U.S. produced goods cheaper for foreigners. This, of course creates demand for our exports. In terms of stocks, this can bode well if you hold shares in well-managed, seasoned multi-national companies -- those that derive more than 60% of their profits from foreign sales. (See the list of industries below)

(5) The increased demand for U.S. goods, mentioned above, puts upward pressure on prices. In fact, this year the U.S. Consumer Price Index has been rising at an annual rate of about 3%. Compare that with the rate back in 2001, which was just a little over 1.6%. As you know, if prices increase too much, Americans will pull back on consumer spending. That could negatively affect stocks of luxury goods and services -- things we do not need for survival.

What you might do

In terms of your portfolio, you may want to consider the following:

• Purchasing short-term U.S. Treasuries or bank CDs. By keeping your portfolio in the "short-term" category (3 to 6 months, 1 year maximum), you will have money coming due and available to reinvest -- either in higher yielding assets or in the stock market.
  
  
• Purchasing stocks in companies that are major exporters, especially to countries that receive a large percentage of their revenues in Euros or yens. (The Euro has been bearing the brunt of the weak dollar.) Among the industries that fall into this category are, in alphabetical order:
  
  Aerospace
  Consumer staples
  Construction
  Defense
  Farm machinery
  Heavy materials
  Industrial machinery
  Medical equipment manufacturers
  Pharmaceuticals
  
  
• Putting a small portion of your portfolio in foreign stocks or a foreign stock mutual fund. As the dollar falls, the value of foreign holdings will rise for U.S. investors. This also adds diversity to your portfolio and you might benefit from the fact that foreign stocks do not always rise and fall in sync with US stocks.

Beyond your investments

You didn't inquire about this, but I urge you to pay down any credit card balances right away -- if the experts are right and the Fed continues to raise rates, you don't want to be paying higher rates on outstanding credit card balances.

It would also be a good idea if you have an adjustable-rate mortgage to look into the advantages of moving it into a fixed-rate mortgage.

Good luck!