Personal Finance Advice

Some analysts say a recession is coming and some say it isn’t. What is for certain is that the stock market has grown increasingly volatile since the summer. While this increases the risks for investors it also increases the chance for reward.

Large movements swings have been the norm the last few months depending on whether the daily news was good or bad. If you had idling cash lying around it would open the opportunity for some serious bargain hunting. There are quite a few stocks that are trading below their historical PE or price to earnings ratios.

Now the big question for many bargain hunters is whether it’s time to jump back into financial stocks or not. There are some big names out there that have lost a large chunk of their market values after they started reporting huge writedowns during the month of November.

While some of them do look tempting, I believe it’s still too early to jump back into financials.  Another surge in defaults is expected after rates adjust upward this quarter for the many ARMs that weren’t affected by the government’s bailout plan. There is also the fact that we are still in a credit crunch and while we may get it under control sometime soon in this country, that may not be the case for the rest of the world.

The housing market is also expected to continue it’s slump well into this year and possibly the next. So, while the financial sector may get it’s house in order and implement smarter lending practices, at least in the short run there just won’t be as many avenues open for profit potential as there were in the past.

However, this is definitely a sector that needs close attention in the next few months. Finding the right time to get back into these stocks should net you a tidy bit of profit as they climb back to their historical PE levels.

2008 is shaping up to be a murky year for the economy and the stock market.  A turbulent end to 2007 has many analysts wondering if the long bull run might be over.  Investors will face many difficult choices on where to best put their money to good use.

While the bond market is often seen as a safe haven in troubled times, even it has it’s share of risk.  Fears of inflation coupled with a weak dollar, not to mention the impact of international involvement, could send long term rates soaring and bond prices tumbling next year.

Commodities markets seem highly favorable now with the prices of oil, food and gold skyrocketing this year. However, any analyst will tell you that these markets are highly volatile and that with the chance of high reward comes high risk.  So while this market makes a good hedge against inflation, you wouldn’t want to bet the farm on it because that’s what this market is, a gamble.

Most analysts tend to agree that tech stocks will perform comparatively better than other types of stocks even if the economy were to go into a recession.  But who can forget when the tech bubble burst earlier this decade and with many fleeing into tech stocks nowadays, investors might be bidding up prices to unreasonable levels.

While the housing market as well as finance stocks are down in the dumps at the moment, that may not always be the case.  Although I believe that these markets will continue to fall for at least the next six months, an investment in these depressed markets in the near future could be the springboard for substantial gains to your portfolio in future years.

What may seem like a smart decision now, might not be in a few years.  Now more than ever, it is important to maintain a long term view in your investment strategy.

The economy is going through a strange phase right now.  It’s almost like everyone is holding their breath to see what happens next.  While for the most part the economy is doing reasonably well, a key segment of it, namely the housing market is going through turmoil.

This has caused a chain of events that has led us to where we are today.  Weakness in the housing market has caused severe problems in the sub prime mortgage industry, which then caused instability in the rest of the financial sector.  This has in turn forced the Federal Reserve to cut short term interest rates, twice now in the past few months, as well as pump in almost $41 Billion in funds in an attempt to add liquidity to the system.  All of this has raised a mounting fear of inflation in the marketplace.

Are your investments hedged against inflation?  Most normal investors will hold a mix of stocks and bonds in their portfolios.  But how well will they do in times of high inflation?  Typically not so well.  Stocks will tend to fall in anticipation of higher interest rates to combat rising inflation.  The price of long term bonds will fall as investors will demand higher yields in an inflationary environment.

So what does well during high inflationary periods?  Well, I’ve already mention in some of my previous articles how food and energy prices have been skyrocketing lately, which are the main reasons why most people are afraid of inflation now.  Might it not be wise to invest in those markets?  I am of course talking about the commodities market.  Now usually this market is for the most sophisticated of investors, those that are familiar with futures and options.  However there are some mutual funds that invest in these markets so anyone can get in on the action.

Other areas that tend to do well are precious metals and foreign investments.  Precious metals will usually keep pace with inflation.  As for foreign investments well, if our country has a higher inflation relative to another country, our currency would grow weaker against that other nation’s currency.  However, that just means that when you finally do convert those investments back into dollars, you would have more dollars from the foreign investment than you would if you had gone with a similar domestic investment with the same rate of return.

Now we come full circle.  The final area that usually does well in a high inflationary period is none other than the real estate market.  So while these lower interest rates may eventually fix the sagging housing market, they may wreck the rest of the economy to do it.  Isn’t if funny how these thing turn out?