Betting against the U.S. dollar seems like a sure way to make money. After all, the dollar's been falling for years, and as traders say, "The trend is your friend."
Then there's Warren Buffett, the leading investor of our time, telling all and sundry that his Berkshire Hathaway conglomerate has big bets against the dollar. There's Forbes magazine saying one reason there are lots more billionaires in the world is that it takes far fewer euros or yen to make a billion U.S. dollars than it did three years ago. Finally, there's Wall Street, which is rushing to offer mutual funds and foreign-currency bank accounts to let retail investors like you and me bet against the dollar the way the big boys do.
So should you bet big bucks that the greenback will keep falling? I think not. History shows that rushing to buy a popular asset class is an almost sure way to lose money. In hindsight, the best time to have bet on the euro's rise against the dollar was three years ago, when Europeans were despairing of their currency and some people were worried that the dollar was too strong. These cycles have a tendency to reverse themselves, and it's easy to get caught going the wrong way.
To a contrarian like me, the down-on-the-dollar products that Wall Street is offering are a sign that the dollar may be close to its bottom. So is the heavy media attention to the dollar's decline. I say this with my tongue tucked somewhat into my cheek, of course. But the media focus on what's popular -- and the Street sells what it thinks you will buy, not necessarily what's good for you.
Remember 1999, when the Nasdaq market rose a record 86 percent? Wall Street peddled Nasdaq and tech-stock products like crazy, even though it was the worst possible time for investors to buy them. When grandmas were cashing in CDs to buy tech funds six years ago, it was time for the rest of us to clear out. Popularity and prosperity are different things.
Trading currencies is a game for hedge funds, investment houses and other pros -- but we're not pros. Buffett is a pro (and a director of The Washington Post Co.), but he's not going to call you when he changes his currency bets.
It's one thing to take the dollar into account when you are making investment decisions, just as you should think about things like interest rates. But if you're not a pro, don't play with currencies unless you are doing it as a lark or as a tiny part of a large, well-diversified portfolio.
People like me, who have been skeptical of the dollar for years because of our horrendous trade and federal budget deficits that we think are unsustainable, typically invest in foreign stock funds. The dollar helps determine our profits -- but its fate is of only secondary importance. The idea is to buy either a low-cost index fund, or an active fund run by a manager whose investments you think will rise in value regardless of the dollar.
Don Phillips, managing director of mutual fund analyst Morningstar, says that "if you've got five or six funds, these [short-the-dollar funds] shouldn't be your sixth or seventh." He points out that currency trading "is a zero-sum game" because every winner's gains are matched by a loser's losses. That makes costs all-important, he says -- and these funds are not exactly cheap.
The bottom line: Invest the way you always should -- calmly, long-term, with a diversified portfolio. Don't go chasing hot asset classes like short-the-dollar funds, because you are almost certain to get burned.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.