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. 

For the second time in two weeks the stock market rallied for it largest gain in five years.  The Dow Jones surged 420 point for it’s fourth largest gain ever as blue chip financials lead the charge.

The Fed cut the benchmark fed funds rate by 75 basis points to 2.25%, it’s lowest level since December of 2004.  Over the weekend the Fed announced an emergency rate cut of 25 basis points to 3.25% in it’s lending rate to financial institutions.  It also opened up a new lending facility for securities firms and increased the term of it’s loans from 30 days to 90 days.

While it was less than what the market had been expecting it couldn’t put a damper on the relief much of Wall Street felt after Goldman Sachs and Lehman Brothers both released quarterly earnings statements that beat analyst’s estimates.  Both companies rebounded sharply on Tuesday after taking big hits to their stock values when investors began a general selloff of financial stocks after the fire sale of Bear Sterns  to JPMorgan was announced on Monday.  There was a growing fear for many investors of an imminent collapse of the other investment banks.

The companies reassured investors of their strong capital positions and that they would not meet the same fate as their rival Bear Stearns when it ran out of cash and was unable to meet it’s margin calls.  The estimated cash and short term assets for Goldman and Lehman were at $60 billion and $90 billion respectively.

While a strong rally when a rate cut is announced is nothing new, it will be interesting to see if the market will be able to maintain it’s momentum.  The effect of the rate cut on exchange rates and commodity prices may start to erode those gains in the upcoming days.