By Jackie Cohen -
SAN FRANCISCO - Whether politically motivated or profit-driven, investors have been paying more attention to overseas opportunities since the Nov. 2 re-election of President Bush.
Regardless of feelings about the direction of the country in the next four years, the direction of the dollar is causing many to examine foreign strategies. And the lifting of the federal debt ceiling in early November by $800 billion has only sharpened the focus.
"The Bush government isn't terribly concerned about budget deficits in the short and long term," said Michael Kitces, a financial planner in Columbia, Md. "That could result in higher interest rates, possible inflation and a weaker dollar."
The currency trend surfaced as soon as the Republican presidential victory was confirmed.
Kitces described the phenomenon as "shorting the dollar." When investors believe American bucks hit a nadir, people will likely buy the currency while selling out of foreign positions.
But for now, "I would look to having cash invested in many countries," Kitces said. "If you had to pick one place, try the euro or investments in other stable countries."
Other timely strategies include mutual funds that hold assets in foreign denominations, plus
Mutual funds invested in nondollar-denominated securities (that are not currency hedged) include: Causeway International Value Fund, Dodge & Cox International Stock, Vanguard International Explorer and Fidelity Diversified International Fund.
One caveat: Watch out for mutual funds designed to hedge currencies against one another, because they will not profit from a declining dollar. Read through the prospectuses to determine the portfolio managers' strategies.
Meanwhile, yet another approach looks at individual stocks outside of the United States.
"Investing in international equities right now is a bet against the dollar rather than a bet on stronger foreign countries and companies," said Dean Harman, a financial planner in Woodlands, Texas. "It might even make more sense to invest in U.S. multinationals."
Many such companies can be found within ETFs based on the Standard & Poor's 500 and other major U.S. indexes. Global fixed-income mutual funds and ETFs provide yet another offshore opportunity with more diversification than individual bonds in foreign countries.
However, "U.S. fixed income is a better place to be than foreign ones, because analysts are expecting the yields to go up," Harman said.
Harman periodically fields questions from high-net-worth clients about much riskier offshore strategies: transferring assets to locales considered to be tax havens.
Yes, that is tax evasion in the IRS' eyes, unless the investor reports offshore income and pays U.S. taxes accordingly.
Forming a foreign corporation legally shields money from taxation in the United States, although the federal government still expects such entities to pay up for any income earned in America.
However, moving the money back into the United States involves a lot of red tape even in the best-case scenario. The IRS levies taxes on repatriated funds, and often audits them, as well.
An audit might lead to an investigation and possibly charges of tax fraud if the tax agency gathers sufficient proof -- such fact-finding has gotten sophisticated in recent years.
"Antiterror, antidrug and anti-money-laundering laws enacted over the past 20 years, combined with the millions of dollars spent by the government on improved technology, make it a lot easier to catch people trying to evade taxes," explained Tony Santos, a partner at the international law firm Rojas Santos Stokes & Garcia in Miami.
All of these factors together create a "myriad number of ways that someone could get caught," Santos said.
Source: Contra Costa
