How to invest when the dollar is strong | Colony Hills Capital (2024)

The US dollar went up in value 18% between 2021-2022.

If you’ve ever traveled overseas (say, London or Paris) you know the feeling a weak dollar brings. Suddenly, everything becomes more expensive than back home.

Not so with a strong dollar though. If you traveled abroad in 2022 you may have been pleasantly surprised to see your cash go further.

Is a strong dollar a good thing, then? For tourist visits, yes, but a rising dollar can have a negative impact on the global economy and your portfolio – especially if you skew towards investments most likely to be impacted by the fluctuations of the dollar.

In this article we will examine what a strong dollar means for your portfolio, and how you can diversify your portfolio to limit the impact of a strengthening dollar. While much of this advice may seem topical, we think it’s a great way to balance and diversify a portfolio to hedge against risk whether it be 2022 or beyond.

What does it mean for the dollar to be ‘strong’?

The strength of the dollar is measured by how it compares to other currencies around the world. A stronger dollar will be worth more compared to another currency.

Currencies rise and fall periodically. This is a natural cyclical element of the global economy. If a country has strong economic growth, its currency will be sought after, which causes the price of its currency to rise.

The dollar usually has a bit more cachet due to it being considered the world’s “reserve currency”. However, recently it has continued to rise because the US economy looks much healthier than those around the world. While the US has certainly struggled with inflation in the past year, Europe is particularly hard-hit due to energy supply disruptions resulting from the war in Ukraine and may already have entered a recession.

Pros and Cons of a strong dollar

A strong dollar is not entirely ‘good’ or ‘bad’; there are some benefits and disadvantages to be aware of.

Pros of a strong dollar

• International tourism is cheaper – the stronger the dollar, the further your dollar goes abroad. This makes everything from meals to souvenirs cheaper.
• Imports are cheaper – companies that rely on imports will be pleased with a strong dollar as their imports become cheaper, improving their profit margins.

Cons of a strong dollar

• World economies are negatively impacted – the stronger the dollar the harder-hit other currencies and countries will be, especially those in debt to the United States.
• International companies suffer – companies that do business abroad will suffer as a result of a strong dollar as their business overseas declines.

The biggest con of all though (depending on your point of view) may be that a rising dollar negatively impacts the global economy, which negatively impacts companies that do business abroad, which can hurt your portfolio if it is not properly diversified.

What happens if the dollar is too strong?

The stronger the dollar the more hard-hit the global economy will be, particularly in developing regions of the world. Many countries in emerging markets borrow in US dollar terms, meaning that their debts become more expensive to pay back in their currency as the dollar rises.

A strong dollar can also disrupt the stock market (as we have seen in 2022). US companies that do business abroad (many large cap ones on the stock market) are hurt by a strong dollar as income abroad drops.

How to adjust your portfolio for a strong dollar

As the dollar rises, it’s time to adjust your strategy.

Rather than think of this as a short-term fix, view this as a way to further diversify your portfolio to bring gains in the long run. In an environment where the dollar is strong there are a couple things you can do to hedge against the downsides and protect your investments.

Shift your stock portfolio to small/mid-sized companies

As the dollar rises in value, companies that do business overseas will be hit hard, this makes a strong dollar a great time to invest in smaller-cap companies that do business exclusively in the United States. A strong dollar makes doing business in the US cheaper, especially if companies rely on imports from overseas. So it’s a great time to diversify your portfolio with smaller-cap stocks.

Shift your investments to real estate

As the dollar grows in strength, you should seek investments least-impacted by overseas activity. One of the best investments you can consider in this category is US real estate. Real estate is generally a great mid-to-long term investment option as it has historically risen year over year (with some short-term dips like any other investment). Real estate looks to be particularly attractive now, as a safe haven for your investments with a rising dollar and turbulent economy.

There are many classifications of real estate: single family homes for instance or multi family properties (ranging from duplexes to apartment buildings).

Investing in multifamily real estate can be particularly attractive due to the benefits it provides, such as:

• Passive income from rent payments
• Numerous tax benefits
• Profit on the sale of a property

As a result of these benefits, we strongly recommend looking into real estate as a way to diversify your portfolio, especially as the dollar continues to strengthen.

How to invest in real estate and protect your portfolio from a strong dollar

There are many ways you can invest in real estate, though one way that is growing in popularity is through a multifamily real estate syndication. As a result, there are plenty of platforms out there that you could pick from to start your investing journey.

If you recall, real estate syndications allow you to decide which property you invest in. As a result, it’s critical that you invest with a highly experienced group with a strong track record for success and who invests alongside you.

At Colony Hills Capital we are experts in the acquisition, ownership, and management of property in growing markets around the country. While we cannot guarantee results, we always aim to provide consistent and above average passive income to our investors. Past performance is no guarantee of future results. Interested in investing? Contact us today to learn more.