How to Diversify a Currency Portfolio

To trade successfully in the currency markets, you need to follow the same rules of investing that guide stock market investors--diversify your holdings. While this plan could lower annual returns somewhat, it's a prudent idea that will safeguard your portfolio against sudden changes in the currency markets. Read on to learn how to diversify a currency portfolio.

Instructions

1. Go international for your passport to currency diversification. Investing in an international bond or equity fund will hedge against your U.S. investments and leave you less vulnerable to fluctuations in the U.S. dollar. This is perhaps the easiest way to achieve currency diversification.

2. Invest in a currency ETF (exchange traded fund), such as the Euro Currency Trust (NYSE: FXE). ETFs are funds that trade on the NYSE like a stock. Currency ETFs rise and fall in value with their respective currency.

3. Spread your portfolio into the top five currencies. If you're trading currencies directly in the FOREX markets, a good diversification plan is essential. One way to do this is to divide your funds into fifths, and put each portion into one of the top five performing currencies of the past six months.

4. Buy into a currency mutual fund, such as the Franklin Templeton Hard Currency Fund. A currency mutual fund invests in a basket of currencies and hedges for their fund investors. Different funds will have different strategies, so be sure to read the prospectus before investing in a fund.

5. Put your funds into foreign currency Certificates of Deposit. Banks are creating new products which go outside the normal U.S. dollar CD. You can find CDs that are invested in world currencies and pay interest rates based on those currencies. Some of these CD products invest in multiple currencies for even greater diversification.