By Billy Fisher NEW YORK ( MainStreet)-- Investing in currencies is an endeavor that is foreign to many individual investors. However, a little homework on the topic can go a long way towards building a diversified portfolio and reaping the benefits that accompany it. Here are some points to consider if you find yourself wanting to venture into the space. Risk Diversification For investors who have significant cash positions in their portfolios, adding foreign currency exposure may make sense. "A lot of people perhaps are sitting on the sidelines in light of the current market environment and they're probably sitting in cash that's earning little or nothing," said Bill Belden, managing director and head of product development at Guggenheim Investments. "When you're concentrated in a single type of currency, you're taking on a degree of risk that you probably don't fully understand and certainly wouldn't feel comfortable with should you understand it."
Shareholders of the Merk Currency Enhanced U.S. Equity Fund (MUSFX), which Merk manages, have recently witnessed the return potential of a more sophisticated currency play. "We have a strategy where we have a currency overlay on top of the S&P 500 and that's all packaged into a mutual fund," he said. "Basically what you're doing is you're optimistic of the S&P 500, but rather than buying international stocks, we use an absolute return methodology and put that on top of the S&P 500." The fund has surged 36.2% over the course of the last 52 weeks. Suitability Investors eyeing a foray into currencies should consider the inherent risks involved. "Investing in currencies is a totally different ballgame," said Tony Welch, president of Sarasota Capital Strategies in Osprey, Fla. "Investors must realize that currencies are relative plays. Every stock in the S&P 500 could go up or down in one day, but currencies are one currency versus another one. That's a big distinction." Welch explains that foreign currencies may not be suitable for some individual investors. "There are professional currency traders and they make money, but it is a very different game than investing in stocks and bonds," he said. "The average do-it-yourself investor would probably be more well-rewarded by spending their time analyzing equity and fixed income markets than they would currency markets."
Read: Do Cool Sh*t When it comes to playing foreign currencies, the amount of time investors have to devote to managing their investments may be the deciding factor. "I don't think everybody should avoid them, but if you have a fixed amount of time to spend on your portfolio, I would spend the time in places other than currencies," Welch said. --Written by Billy Fisher for MainStreet