Personal Finance Advice

With the increased volatility in the stock and bond markets, most investors need to start thinking long term.   Although a smart day trader can do quite successful in this type of economic climate, the risks are considerable.

However, for most people this is a time of high anxiety, though it need not be so.  For investors with a time horizon of five years or longer, this is a golden opportunity to buy.  While the stock market might not have hit rock bottom quite yet, prices have fallen considerably from their highs of last summer.

There are many factors to consider when choosing which type of investment vehicles to put your money in.  The importance of proper asset allocation can not be overstated.

The simplest way for most people to diversify their stock portfolios is to invest in mutual funds.  While no amount of diversification can do away with risk entirely, it will help minimize potential losses.

The amount of risk individuals are willing to take on is subjective and will vary from person to person.  The bond market for instance might be a relatively safe investment but if the economy is entering an era of rising inflation, those gains can be quickly eroded.  If you also had some money invested in an inflation hedge like commodities, which is considered a relatively risky investment, your overall risk would be reduced.

A lot depends on what your financial goals are.  Whether you are saving for a new home or planning for retirement, it is important to map out what you want to achieve as well as the time frame you want to achieve it in. 

While a lack of liquidity in the credit markets are providing a natural break in spending, many Americans are also tightening their belts with the prospects of recession on the horizon.  Consumer spending has slowed considerably over the last few months and it’s having a noticeable effect on the economy.

It is unfortunate that it takes this kind of situation for people to finally start thinking about saving money.  The amount of debt we have in our society is ridiculous.  For many people, their idea of budgeting is the limit on their credit cards.  The government is no better with the national debt at $9 trillion and rising.

It can be difficult to save money in our over commercialized society.  We are being constantly bombarded with marketing spam at every level, when you watch television or surf the web, we even get it from text messages on our cell phones now.

As ridiculous as it sounds, the current economic climate actually seems to encourage more debt.  Rising inflation and low interest rates greatly favors debtors rather than savers.  This can be misleading however, since our economy doesn’t exist in a vacuum.  With the dollar falling to record lows, the relative wealth of our economy compared to the other nations of the world is taking a serious beating.

It is really the savings rate of a society that builds up wealth over time for an economy.  Over the years, our society’s savings rate has dwindled and the accumulation of debt has grown to epic proportions.

As much it would help the economy for us to spend our way out of a recession, is that really the best thing for us as individuals or as a society?  Debt and credit can be powerful tools to help leverage your financial situation, too much of it however can be disastrous.  You need only look to our highly leveraged financial system to see how that is working out now.

Federal Reserve officials and executives for JPMorgan and Bear Stearns were called in for testimony today before the Senate Banking Committee.  Lawmakers called for the hearings because of the controversy surrounding the fire sale buyout of Bear Stearns and the use of taxpayer dollars to finance the acquisition.

A run on the investment bank crippled the cash position of the firm, leaving it unable to meet it’s margin calls.  Fed officials vigorously defended their actions, stating that their intervention prevented further damage to an already weak financial system.

The initial $2 a share buyout offer was geared towards lessening the risk exposure to taxpayer dollars although it was raised to $10 a share a week later.  It doesn’t appear as if lawmakers will attempt to block the deal, accepting the Fed’s testimony on the economic consequences if they hadn’t taken action.

The Fed is reaching their lower limit on how much they can continue to cut interest rates.  Many investors are expecting another half a percentage point cut but after that who knows.  The dollar is being hammered on currency markets causing an upward pressure on the prices of dollar denominated assets like crude oil.

The Fed has also had to open up it’s discount window to investment banks something it hasn’t done since the Great Depression.  Bear Stearns CEO, Alan Schwartz remarked that his company may has survived if the Fed had instituted that policy sooner.

If this situation has proven anything, it’s that some institutions are vital to the financial system and are too big to let fail.  With the current financial crisis far from over, the Fed may be called again to use taxpayer dollars to prevent the further deterioration of the nation’s banking system.