How to Invest in Currencies

Currencies can be a good investment due to their low-cost of entry and virtually complete liquidity.

The main argument against investing in currencies is that most investors don't know when it's time to move out of a specific currency. So here is a way to help you identify when to enter and when to leave a currency.

For the long-term investor, as with commodities, "long-term" for currencies is not 20 to 30 years, but three to five years.

Why three to five?

As Bill Clinton once said, "It's the economy, stupid." Fundamentally, the strength of a currency reflects the strength of its underlying economy. All else being equal, a strong economy means its currency is strong.

Our ability to predict the strength of an economy -- limited to begin with -- does not carry over a period longer than several years. Why? There are just too many factors in play, such as inflation and interest rates, job market, stock market, political dynamics, laws and regulations and major geo-political events (think Sept. 11, 2001).

Furthermore, the relationship between those factors and the performance and strength of an economy is not straightforward to analyze and understand. Not to mention that some events are simply unpredictable.