My intent at this site is to stress retirement income generation, although I do and will look at other asset types, if only to keep up on them. I am retired and ~90% of my holdings are income orientated. The rule is that nothing goes into the total portfolio without generating at least 4% cash annually, unless it is an excellent hedge of that 90%. In some cases--preferably all--the hedges themselvesare income generators. An example is Pimco's Commodity Real Return Fund (PCRIX/PCRDX) which is generating about 5% cash because it's underlying  collateral is invested in US TIPs.

 

Before I get back to basics on the income generating funds, I'm looking again at some of the readily available currency funds. (By the way, you can go back and look at articles under Portfolio Ideas for income generators.)

 

The chart shows annualized total returns (with all dividends reinvested) for six funds for the past nine to ten months. I started it from when my total return data base for UDN started. HSTRX and PRPFX are not generally thought of these days as currency plays, but they are. HSTRX trades up to about 20% of its assets either in gold stocks or in currencies, and PRPFX holds a large gold bullion and a Swiss franc position. I own HSTRX for several reasons: it is managed rather adroitly by John Hussman, and it is less volatile than the others. The cash dividend is, alas, only about 2% but it has fairly consistently returned about 4-5% also in trading profits per year. PRPFX has been in operation since the early 1980's and holds fixed amounts of US T bills, Swiss Franc T bills, gold, and growth stocks. It doesn't pay a cash dividend, so I don't own it, but it could be an excellent fund for a taxable account. Morningstar gives it a very high "tax efficiency" rating. BWX holds foreign sovereign T Bonds and pays a dividend, but I don't care much for it because it has too many variables: currency, interest rate, and bond duration.

 

FXY and FXF are Rydex currency funds which pay little or no cash dividends and are simple proxies for the yen and franc respectively. Rydex has similar funds for British pound, Swedish krona, Australian and Canadian dollars, etc. which do pay some dividends UDN is a Deutsche Bank mixed currency play which roughly simulates an inverse or short US dollar index. These may fit into niches, but unless one owns a lot of it, it won't make a whole lot of difference in dollar hedging a total portfolio. These work better for people who don't need the income currently. PCRIX and HSTRX work better for those who do need or want current income.

 

Gold, of course, makes an excellent hedge. During the same time period used for the chart, the gold ETF GLD was up  39.9% annualized, nearly double the nearest contender FXF (Swiss franc). I have ~10% of my total portfolio in gold bullion which I have owned since before 2002. Of course it pays no dividend and can require storage and/or insurance. For younger people I would recommend putting a fixed dollar amount into gold each and every month. I started doing that in the 1970's. I set up a savings account back then and put $500 per month in it. When I had enough for one or more  one ounce gold coin(s), I bought them. That approach is a lot safer than buying a big stash all at once and then seeing it go down....whooosh! You could do the same thing with small lots of GLD if you use a deep discount broker. Even if you only bought $500 a month of GLD (about ten shares), if you do it over time it will make a big difference. But you have to do it every month! If you know you can afford it and will do it, you could set aside more. When gold goes down you will be happy because you can buy more with the same amount of money. It sounds stupid, but that's how you will feel.

 

If you are older and have a large enough portfolio to live on, or are younger and have hit some sort of lottery, maybe it's wise to buy 10-15% into gold in a fairly short period of time. You could do it all at once, but I'd probably do it over six or twelve months. I like dollar cost averaging.

 

These are the basics for hedging a US dollar income portfolio: some vehicles which themselves pay a meaningful dividend, and 10-15% in gold. I wouldn't recommend putting a huge percent of assets into gold "all at once" as it can and does go down for long periods of time too. Ditto for PCRIX or other commodity or currency funds.