by Archie M. Richards, Jr.
October 1, 2007

John writes, "What effect does the falling dollar have on the economy, inflation, and investments? I hear and read that we should be buying foreign currencies."

The effects on the economy I don't know, John. But the long-term effects on the stock market are . . . zero.

Here's evidence: In 1978, the dollar was very low. The market subsequently went up. In 1985, the dollar was very high. The market went up. In 1995, the dollar was again very low. The market went up. The dollar's effect looks like zilch to me.

The turnover in the world's currency markets has risen to an astounding $3.2 trillion per day! (The total U.S. economy is $13.8 trillion per year.)

Heavy buying of foreign currencies is creating what seems like a panic sell off of U.S. dollars. If you want to engage in that treacherous market at all (which I don't), I'd sell foreign currencies, not buy them.

I am grateful to John Howard, a reader of this column, for improving the spreadsheets posted in the "Suggested Portfolios" section of this web site.

The formulas I wrote previously worked under some circumstances, but not others. John's formulas work all the time.

He also devised an intriguing system of colors. When a security rises above the 20 percent mark (see my website), the amount to be sold turns red. When it falls below the 20 percent mark, the amount to be bought turns green. Many thanks to John for his wonderful improvements.

Jim asks, "Who receives the dividends paid by the stocks held by exchange-traded funds: the ETF or the investors who own ETF shares?"

The ETF does, Jim. As owner of the stocks, it receives the dividends. That's part of the advantage of ETFs. As owner of ETF shares, you participate in a tiny portion of hundreds of stocks. But you can buy and sell the ETF shares without having to fuss around with the underlying portfolio.

Okay, the ETF takes in the dividends, deducts its fees, and pays the balance to the owners of the ETF shares.

But the fund doesn't pay the dividends directly to the ETF owners. To cut costs, all ETF shares are held electronically by brokerage firms. Certificates of ownership aren't issued and dividends aren't sent to the home.

The net dividends are credited to your brokerage account. You can do with them as you please, preferably to purchase more ETF shares.

Arnie writes, "In one of your columns, you advise to "not fiddle" with the portfolio. But when my income allows it, I want to make monthly additions of a few hundred bucks. Should I invest this money monthly, or should I leave the money in the money market fund and allocate to the funds once a year?"

By "not fiddling," Arnie, I meant to not sell ETFs except when rebalancing. Frequent buying is fine.

With ETFs, accumulate cash until you can invest a minimum of $500. This reduces Foliofn's commissions to 1 percent or less.

Max writes, "At Vanguard, I have a Traditional IRA, a Roth IRA, an individual account, and a variable annuity. Should I set up the allocations you recommend in each of the accounts, or can I spread the allocations among all of the accounts?"

If you spread the allocations among all four accounts, Max, the tax laws prevent proper rebalancing, because you can't transferring cash between the accounts.

Rebalancing is an essential part of investing. To do it right, each account has to be completely diversified. Whether you carry this off depends on the size of the accounts and how much work you're willing to do. Tax laws make rebalancing a pain in the neck.

Let's say you invest $2,000 a year in an account for a newborn grandchild. You stop after 10 years, having invested $20,000.

But the account continues growing - we'll assume at 9 percent a year. When the child reaches age 65, the account is worth a whopping $3.4 million!

Let time and the market do the job. Compounding is magic!