Wednesday, January 15, 2014

Kesef B'Kesef Alternatives: Part II

Well loyal readers, it’s just like when you have to go to a meeting with your kids’ teachers. Let’s just get this over with as quickly as possible so that we can get back to things we feel competent at doing, like online shopping. (Discussion topic: are fast talkers more likely to become teachers? Or, do teachers develop this skill in the wild because they only have 4 minutes to talk to each parent? Discuss.)

It’s time for the second basic alternative for how you can protect your money from a weakening dollar without making aliyah. Spoiler alert! It’s probably easier to just bring your money to Israel.

Second Basic Alternative #2: Currency Hedging

Slow down there, Mr. Fancy Pants. What’s hedging and why would I want to do it?
In this very simple alternative, you would just open a forex trading account and short the shekel. This is a very good option for you if you (a) know what “forex” is, (b) you know what it means to “short” something, and (c) you agreed with my use of the word, “simple” in the previous sentence.

This option is good because it is highly versatile. It will work whether your money is invested in stocks or bonds, whether sitting in your bank account or trapped inside the house which you haven’t yet sold. It will work for money in whatever form it takes, liquid or solid.

To make this option work for you, you would take a “short position” in the amount of the dollars that you have against the shekel. You would make money or lose money in the opposite direction of the way the exchange rate goes. If the dollar goes up against the shekel, your position would lose money, and if it goes down, your position would make money. Happy example: 

You have $100,000 that is worth about 350,000 shekel today. Next year, the dollar gets weaker and your $100,000 is only worth 325,000 shekel. No problem! You simply cash in your “short position” which will be worth 25,000 shekel and you still have a total of 350,000 shekel. 

The only major “gotcha” with this happy example is that you will have to pay taxes on the 25,000 shekel gain. That dampers some of the happiness, but it is a small price to pay for not having to worry about your money losing shekel value.

One of my highly intelligent friends is doing this in advance of his aliyah. Had I been highly intelligent before I made aliyah, I probably would have done the same thing. But I wasn’t highly intelligent, so I didn’t do it.

By taking the “short” position, you are basically “freezing” the value of your dollars against the current price of the shekel at whatever point in time you take the short position. This is good because you won’t lose any more shekel value, but it also means that you want gain any shekel value if the dollar strengthens. Less happy example:

You have $100,000 that is worth about 350,000 shekel. Next year, the dollar gets stronger and now your $100,000 is worth 375,000 shekel. Nope – no happiness for you! You cash in your “short position” and pay 25,000 shekel. You still have just 350,000 shekel.

This is not a happy example, but that is the price you pay for wearing those fancy pants. Although, if you wanted to share in the happiness that comes from having dollars that get stronger, you could balance the risk differently by taking a short position at less than the amount of dollars you have. Or, you could take a position at greater than the dollars that you have if you want to bet even more that the dollar will get weaker. But at this point, you would be a currency trader. In that case, please tell your butler to stop reading this blog to you. His time would be better spent in fetching you more strawberries to dip into your halava fountain. I hope you enjoy them while thinking about the difficult problem of which of your villas you want to live in tomorrow.

So what’s the bottom line?

For regular people, this approach may be just a bit too complicated. However, if you haven’t made aliyah, and need a quick and easy way to “hedge” your risk, I could put you in touch with my highly intelligent friend who could help you do it.
I haven’t asked my friend if he will help you, but I’m pretty sure he would because he is Canadian, and Canadians are really nice people. Also, even though his hedge involves “CAD”s which is the currency code for “fake dollars”, he could still show you the path because it works the same way.

This may also be an option to consider if all of your money is stuck in dollars; for example, if all of your money comes from fixed monthly pension payments in dollars. Otherwise, it would be simpler and easier to just take some of your money and convert it into shekel.

So, how does one invest in Israel?

Why do people keep asking that question and answering it with a question? I don’t know, but keep reading this blog and I’ll tell you what I learned by accident. 


  1. This topic has been on my mind a bit recently and I don't think there are any perfect answers aside from balancing exposure - which is what companies that operate internationally do. Of course, they have access to esoteric instruments that we mere mortals do not. I will just throw out a few considerations that I hoe you will address. (1) US stock indexes have greatly outperformed the loss in the exchange rate over the past 2 years, so keeping your money there would have been a better idea at least for now. (2) on the other hand, you technically only have 10 years from making aliyah to avoid israeli taxes on capital gains from abroad. (3) Consider whether a US dollar mortgage on a home in Israel can help balance risk even if your income is in shekels. (4) At what point should you leave money in a US retirement account vs absorbing the penalty and moving it here. (5) Do not under any circumstances stop collecting BB&B coupons. (6) People need to realize that any strategy that reduces risk (protects from volatility) is going to reduce potential upsides. If you adopt a strategy today, you still need to decide what you think the prospects are for the exchange rate in order to weight things. If you think the dollar will recover then adopting a strategy that locks you into a narrow range is also problematic. (7) Forward contracts? (8) Remember your somewhat dim-witted roommate who was in Sy Syms? Google him. He's probably making bucket loads working some options scheme for a hedge fund. Ask him for advice.

    Anyways, I'm not sure why the invest in israel from abroad strategy makes sense as the shekel's appreciation is not directly a function of the strength of the TASE.

    1. Thanks, MJ for the comments. I definitely agree about the BB&B coupons. I still have mine.

      I work for an international company and the budget is kept in dollars and converted to shekel when needed. The difference is that when a significant downside in currency occurs (like in 2008), the company has plenty of cash to cover so we tend not to feel it at all as just mere employees. Also, they can always balance globally. (You can always grab a few rupees when no one is looking.)

      I've added your topics to the backlog for future posts. Except for #7 because talking about forex is already quite enough on that sort of thing and anything related to derivatives gives me a headache. Everyone will surely look forward to post on #2 because if there is one thing that people enjoy most, it is talking about taxes.

      I probably should have pointed this out earlier, but the idea of making aliyah for your money is not that all of it should make aliyah. It should be like family -- you want to keep some of them in America so that you have a free place to stay when you visit the US. The question is which money would make the most sense to keep in Israel considering the types of stocks and bonds that you can buy here. I have a theory on this that I'll share soon in a post entitled, "The Coffee Hypothesis".

      Looking forward to hearing what you think!