The Weak Dollar is Killing Americans’ Wealth
I just completed my September net worth review and noticed that I am actually less wealthy. While my net worth went up 1.24%, the value of U.S. dollar went down by 2.26%. You may think that this doesn’t concern you, but it does because we are an integral part of the global economy. For my family, this is even more important because we have direct financial dealings outside of the United States.
Beating the S&P 500
The realization that my wealth went down got me interested enough to trace this back to 2000. This period is particularly interesting for me because I have been beating the S&P 500 since then. From the chart below, you can see that market returns weren’t great, but they did manage to yield a 3.31% CAGR (i.e., compounded annual growth rate).
If you’d invested $10,000 at the end of 2000 in an S&P500 index fund, you would have about $13,000 on October 1, 2007.
Currency-Adjusted Investment Growth
Now, let’s look at the U.S. dollar against 3 major currencies: the British pound, the Japanese yen, and the euro.
Historical currency data from FXHistory: historical currency exchange rates
From the chart, you can see the value of the U.S. dollar against these currencies. In column G, I took the arithmetic mean of the percentages in column B, D, and F, clearly showing the declining value of the U.S. dollar. Column H is the result of actual S&P 500 performance adjusted for currency performance. Now our CAGR is only 0.51%!
From the perspective of the global economy, $10,000 invested at the end of 2000 in an S&P500 index fund, was only worth about $10,400 on October 1, 2007.
According to the Inflation Calculator from InflationData.com, the inflation rate from January 2000 to January 2007 was 19.91%. This means that most American investors are less wealthy now than they were in 2000!
What does this mean?
- This doesn’t mean I am going to make any immediate change. For instance, I wouldn’t start gambling in the foreign exchange market (Forex). To me, currencies are not investments. They are speculative, and not suitable for lay investors like me.
- I am glad to have 30% of my portfolio in international funds. But, this doesn’t mean I should increase it to 50% either. I think the key to success is diversification, including having both domestic and international investments.
- This means that our wealth is affected by the global economy. As such, we should be aware of what’s going on outside of the U.S. and looks for way to grow our wealth more at a global level.
Please let me know what you think about this different perspective on wealth by leaving a comment. Thank you.
More about weak dollar:
- The Dollar is Weak. Is That Bad? @ Moment on Money
- Fed Rate Cut – How it Affects the Dollar @ Advanced Personal Finance
- Hedging Against The Dollar: Opening A Foreign Currency Bank Account vs. Buying A Currency ETF @ My Money Blog
- Profit From The Weak U.S. Dollar With Currency Plays And Other Strategies @ The Digerati Life
This was a guest post I wrote for Consumerism Commentary on October 4, 2007.
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My wealth hasn’t been affected one bit.
Ummm.
I was waiting for the bit where you explained why you’re less wealthy. Using your logic, I could compare my investment returns against the, i dunno, argentinian peso, and say that I’ve had a CAGR of 34%! (i’m exaggerating of the drop of the peso).
The drop of the dollar is far more subtle. It might affect job-security depending on your line of work (importer-distributor = bad; manufacturer = good), and can affect stocks and sectors in the same way.
But I think for the average person it matters even less. Your “wealth” didn’t go up as much, but neither did the cost of things you buy (though I could argue the other way, too).
And finally, forex trading isn’t necessarily speculating anymore than buying american vs. foreign stocks. In fact, if you were really worried about the dollar you could sell it short, and offset any losses from your portfolio. (Of course if the dollar begins gaining, you’d offset that, too, but you could argue that you’re then only dealing with the stock risk and not the currency risk — speculating less!)
This is one of the reasons, why I don’t have much of my money allocated to cover broad US indexes. In Euro terms, the US market has pretty much gone sideways over the past few years dollar inflation of the US market.
I submit that the US is replicating the situation that Japan has been in since the late 1980s. First the stock market runs up to a incredible height due to new era hype and screwy bank deals. Then their national bank dumps the interest rate to save the market. This is followed by a housing boom and a general deflationary period lasting a long long time (still ongoing after 17 years) with the Nikkei going either down or sideways.
I’m worried that the US will repeat this song although whether the result will be inflationary or deflationary is up to Bernanke for now.
@Early Retirement – That’s a big fear for me too. And last time I looked, U.S. capitalization is less than 50% of the world’s. My international allocation is only about 30% and I would like to bump that up closer to 50%
@James – Interesting argument, unfortunately, this is affecting me more than average person due to my family’s financial matters outside of the U.S.
At the least, I’d say this make for a good argument to diversify beyond the U.S.
Regarding forex, it may not be as speculative for you (I think you know about forex fairly well). However, for average investor (like me) who never dealt with forex trading — i.e., beyond the scope of investing in foreign stocks and funds — I still think it’s a risky game.
I think for the average person, it depends on to what extent they are “supplied” by the US market. It used to be that the US market was essentially the world market. Not so anymore. This is also why I’m not sure that the past results of the US indices will essentially be replicated in the future. With the current focus on index funds, a lot of people in one particular generation (ours? our parents?) will have a lot riding on the assumption that the US will continue to completely dominate the world economy for another 30 years.
@Early Retirement – Another one of my fear is that a lot of U.S. funds are capital gains time bombs.
Inflation affects Americans more than most Americans think. It slowly erodes purchasing power, whether you “feel” it or not. And since most of our consumer products are imported, there is a direct impact on purchasing power.
Consider diamonds. Cubic zirconia are cheap. Why? Because they can be reproduced in unlimited quantity. But real diamonds are expensive because we can’t fabricate them.
Consider the U.S. dollar. The material costs of printing our dollar are small. Yet they can be printed by the millions. The more that are printed, the less each one is worth. So whether you do business outside the U.S. or not, inflation does affect you. (And I wouldn’t necessarily depend on the U.S. government to give accurate inflation numbers.)
Ryan
P.S. Fight the inflation tax. Vote Ron Paul.
Very insightful post, I live over the pond in the UK, but given that we now compete in a global market place, the poor performance of the dollar and the recent problems with the sub prime mortgage market have caused international repercussions. I know that over here in the UK we are feeling the squeeze and whilst a low dollar may be good for vacations, it makes our good more expensive in the US, thus affecting trade.
I hope that things start to pick up in the US economy soon and I particularly like your point “To me, currencies are not investments. They are speculative, and not suitable for lay investors like me.” I totally agree with this.
@Ryan – Welcome to Moolanomy. When it comes to wealth, inflation is certainly the silent killer — although, inflation is not always bad…
@Make Friends – It’s always interesting to hear how U.S. economy is affecting other country. Thank you for sharing that bit of info.