Currencies

Fear the Forex Market

12/11/07 - 10:38 AM EST

Simon Constable

Also, the forex market is volatile, Armstrong says, and he points out that "margin can do some serious damage," especially to those without very deep pockets.

Trading on margin means borrowing money to pay for a large portion of the trade. While that leverage multiplies the gains, it also exaggerates the losses. Often, leverage is offered to currency clients by brokers, but if the market moves unfavorably enough, then the entire amount of the investment can be lost quickly.

So even if traders gets things right directionally or strategically, they can still lose money if the timing is wrong, says Dan Roe, chief investment officer at wealth management firm Budros Ruhlin & Roe in Columbus, Ohio.

That said, experts agree some exposure to foreign currencies can be a good way to reduce the overall riskiness of a portfolio. So now that you've been warned, what can you do?

Small investors might want to consider buying stocks of companies that would do well if the dollar stays weak, and perhaps even if it doesn't, says Jerry Miccolis, a financial adviser at Brinton Eaton Wealth Advisors in Morristown, N.J.

"Pick U.S. multinationals with lots of new growth potential," he says, highlighting Coca-ColaKO and Procter & GamblePG as prime examples.


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