I occasionally get asked why I include the U.S. Dollar in portfolios.
After all, the U.S. Dollar, like all paper / fiat currencies, inevitably loses purchasing power over time as central banks expand the money supply.
In fact, the U.S. Dollar has lost over 90% of its purchasing power over the last century.
So why include a doomed asset in portfolios?
When building a portfolio, it’s critical to understand how a particular asset or security behaves relative to other assets / securities within the portfolio. In finance, this is correlation.
This is why it’s always interesting when I hear someone say “I am well diversified because I have a bunch of blue chip stocks in my portfolio.” There’s essentially no diversification at all. That’s just a portfolio highly correlated to the U.S. stock market.
True diversification isn’t simply owning 20 different blue-chip stocks. While those companies might be great businesses, they tend to move in lockstep with the broader equity market. If all your assets behave the same way on a bad day (or in a bad year or a bad decade), you aren’t diversified.
The purpose of diversification is to manage risk, volatility and portfolio drawdowns to maximize the probability you’ll achieve your financial / retirement goals. Needless to say, diversification is critically important… portfolio construction drives diversification and the behavior of the overall portfolio.
Furthermore, the performance of the U.S. Dollar is relative against other currencies. So even if both the U.S. Dollar and other currencies are losing purchasing power over time but the U.S. Dollar is losing at a slower pace, it’s producing positive relative performance so it’s not only an investment in the U.S. Dollar but against other global currencies.
Over the past five years, the U.S. Dollar has served as an exceptional diversifier against intermediate and long-term Treasury bonds.
As interest rates rose sharply, bond prices experienced one of their most challenging five-year stretches in history. But that same rising-rate environment, combined with global geopolitical uncertainty, sparked massive international demand for dollars. Foreign capital flocked to higher U.S. yields, driving the dollar up just as bonds were declining.
Below is a chart showing the performance of the U.S. Dollar (Symbol: UUP and Symbol: USDU, purple and blue lines) versus 7-10 Year Treasury ETF (Symbol: IEF, orange line).
Notice the total return of IEF was -9.32% over the last five years while the U.S. Dollar ETFs made about 30% to 32% for the same period.
A quick note on how this is funded: I funded the dollar exposure from Treasuries, not from stocks.
This position is not a permanent, buy-and-hold fixture; I don’t expect cash or currency to outperform productive businesses over multi-decade cycles.
Because it is designed to manage specific cycle risks rather than serve as a permanent allocation, we treat it as a tactical position—protecting capital when traditional bond defenses are under pressure.
Disclosures and Methodology:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions.S ome data may be outdated.
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
