While the stock market is going through a rough period at the moment, it should still make up the bulk of your investment portfolio.  Despite the current love affair some analysts have for commodities, that market should only be used as an inflation hedge and not as the backbone of a sound investment strategy.

So what if commodities are riding high while the stock market has fallen from grace.  Does that mean you should reallocate your portfolio?  Let me put it to you this way, when has it ever been a smart idea to buy high, sell low?  I hate to say this, but if you didn’t already have some of your funds invested in commodities as an inflation hedge, you probably missed that boat already.

Panic selling can be one of the worst things you could do in the current economic situation.  If anything, shrewd investors will be looking out for potential bargains in the stock market that could be the springboard for hefty gains when the economy recovers.

While no stock is recession proof, some do better than others when a downturn comes along.  I have long been a fan of tech stocks due to the high global demand for such products.  Large cap stocks also tend to weather an economic downturn better than small cap stocks.  For investors like retirees who need to live off their investment income, stocks that offer strong dividends could also be a smart alternative.

Smart investors that have a well diversified portfolio with proper asset allocation should just stay the course as they should already be well equipped to ride through the storm.

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. 

As it looks more and more likely that the economy will enter a recession in the upcoming months, many Americans are wondering how bad it will get.  The root of our current economic troubles, the housing market, continues to grow worse.  Housing prices fell again last month as an increase in foreclosures adds to the glut in supply in the market.

The economy lost jobs for the second month in a row as stocks fell to their lowest level in nearly two years.  The Labor Department reported that 63,000 jobs were lost for the month of February following the 22,000 in losses for January.

The Dow fell under for 12,000 for the first time since August of 2006 as bad economic data and high oil prices sent stocks tumbling.  Earlier in the week oil rose to over $105 as OPEC announced it was maintaining it’s production at their current levels.

Energy prices are expected to continue rising, but how high can the price of oil go? Some analysts are saying $120 but there are others who say it could top $150 by the end of the year.  European Central Banks announced this week that they were not cutting interest rates and futures traders are now betting that the Fed will cut rates by 75 basis points later this month.  This will put enormous downward pressure on the dollar in exchange markets and force the price of dollar denominated assets like oil upwards.

The high price of oil is starting to take it’s toll on consumer spending as well.  It is estimated that every $1 increase in the price of oil costs Americans an extra $100 Billion a year.

Amidst all the gloomy economic news is the specter of inflation.  The Fed has had no choice but to put it in the back burner as it slashes rates in an effort to keep the economy from stalling.  As the credit crunch worsens it has had to pump more and more cash into the money supply to compensate.  This week it announced it was making in as much as $200 billion more available to banks as it increased it’s Term Auction Facility amounts from $30 billion to $50 billion.

There is a real threat that we could be entering into an era of stagflation that could last for quite a bit.  I would say that until the housing market starts to improve, we really have no idea how long this economic downturn could last.