Efficient cash investments are US dollar denominated
Regarding cash and short-term cash equivalent investments, to hold any of your cash allocation in non-US dollar denominated securities would simply expose you to shorter-term currency exchange rate risk. This contradicts some of the normal objective related to the cash portion of your investment portfolio, which is to reduce risk and value fluctuations.
Usually an investor holds some portion of their overall investment portfolio in cash designed to cover expenses for some months to some years going forward. Should the investor need this cash, it would be more prudent to have those cash holding be denominated in US dollars, since they would need to pay their expenses in US dollars. Certainly, prices of imported goods could change, but most goods and services that are consumed are domestically produced and dollar denominated.
In addition, despite the securities industry’s completely irresponsible promotion of currency trading to retail investors, the currency markets are no place whatsoever for an individual investor. Currency trading is a zero sum game that places a premium on up-to-the-second real-time information about worldwide developments affecting the currency markets, about flows of funds, and about shifting governmental policies and practices.
Furthermore, knowledgeable and efficient foreign exchange trading occurs at dollar volumes that are far out of reach of the average retail investor. When individual investors engage in foreign exchange trading, it is like a puny human trying to get close to a casino craps table run by elephants. In short, the odds do not favor the human having any reasonable chance even to get up to an efficient trading table – let alone trade profitably against professional traders. If individual investors carefully consider the situation, they will stay far away from foreign exchange trading.
