Diversification-Investing in Foreign Denominated CDs
We have all heard the financial experts telling us to diversify our investments, but how do we obtain diversification for our CASH or short term holdings? One investment vehicle that is gaining popularity is Foreign Denominated CDs (Certificates of Deposits). These are just like regular CDs, except they are issued in a foreign currency (e.g., Euro, British Pound, South Africa Rands).
With the recent downturn in the stock market, record low interest rates and the declining value of the U.S. dollar, these certificates of deposits may be a perfect addition to your underperforming portfolio or an easy way to further diversify.
Although the Foreign Denominated CDs are FDIC insured, they do not come without risk. The biggest risk lies in the daily fluctuations of the currencies themselves. If the US dollar strengthens against the currency your CD is in, you can actually lose money. Despite this fear, many of these CDs are paying interest rates way above and beyond the rate you will get from your local bank. Here are some examples of World Currency interest rates offered by Everbank:
- Icelandic Krona- 12.75% for 3 month CD
- South African Rand- 7.5% for 6 month CD
- New Zealand Dollar- 6.25% for 12 month CD
Just remember the actual yield may differ based on the currency exchange rate at time of purchase and maturation, as well as how often the interest is compounded.
I think these CDs offer the average individual investor an excellent way to mitigate risk and to easily invest in the currency markets. The CDs are offered in a wide variety of currencies with maturity dates from 3 months to 12 months (or longer). Let me know if you have ever bought one of these CDs and how you ended up.
LINKS:
Everbank- http://www.everbank.com
Bankrate- http://www.bankrate.com/brm/news/DrDon/20030324a1.asp
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