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How to Invest in Foreign Currency

By Billy Fisher

NEW YORK (MainStreet)--Investing in currencies is an endeavor that is foreign to many individual investors. However, a little homework on the topic can go a long way towards building a diversified portfolio and reaping the benefits that accompany it. Here are some points to consider if you find yourself wanting to venture into the space.

Risk Diversification

For investors who have significant cash positions in their portfolios, adding foreign currency exposure may make sense. "A lot of people perhaps are sitting on the sidelines in light of the current market environment and they're probably sitting in cash that's earning little or nothing," said Bill Belden, managing director and head of product development at Guggenheim Investments. "When you're concentrated in a single type of currency, you're taking on a degree of risk that you probably don't fully understand and certainly wouldn't feel comfortable with should you understand it."

Belden notes that foreign currencies can be an ideal way to put that idle cash to work. "You're probably better served in terms of the performance of your cash to take advantage of the diversification elements associated with currency, he said. "You can also play a more speculative role with currencies and make calls on the future value of any given pair of currencies."

Gaining exposure to foreign currencies may be easier than some investors realize. Guggenheim's CurrencyShares lineup enables investors to invest in currencies through traditional brokerage accounts. "We feel that exchange traded currency products are the best way to participate in the currency market," Belden said. "The ease with which you can get access to the currencies is very attractive relative to having futures accounts."

Currencies v. Stocks

Investors who have shied away from currencies may believe that owning international stocks is enough. "Most investors think they are being diversified when they invest in international stocks," said Axel Merk, president and chief investment officer of Merk Investments. "The only thing they are getting is additional beta. International stock markets are very highly correlated to U.S. stock markets."

Merk emphasizes that investor fears of volatility may be overdone. "Currencies are actually much less volatile than either equities or bonds are," he said. "When the Euro moves a full cent from $1.33 to $1.34, it makes the headlines because it's a major move affecting economies, but when you are dealing with a stock that moves from $1.33 to $1.34, nobody even blinks."