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Best Investment Advice: "Stay The Course"

Best Investment Advice: "Stay The Course"

Over the last several weeks, the tumultuous financial markets have caused much stress and strain among both individual and professional investors alike. Having worked in the financial markets over the last forty years, I can personally attest to the fact that the wild swings (volatility) in the stock markets, bond markets, and commodity markets are unprecedented. Yes, we have had big moves in the market in the past, both up and down. However, rarely, if ever, have we had huge swings of 4-5% both up and down in the same week! Nor have we had interest rates drop 100 basis points (a full 1%) in a matter of 2 weeks time, when the outlook for the creditworthiness of United States Government debt was lowered and the expected reaction was for interest rates to rise! Welcome to the struggle between the bulls and the bears as the marketplace wrestles with the question of a “double-dip” recession.

In recent months, this column has dealt with the two most important ingredients in the economic mix: employment levels and housing values. While many economists have focused on consumer spending as the key ingredient for the last 25 years, clearly the credit crunch has placed that metric on the back burner. Consumers first used their rapidly increasing home equity values as the ATM machine to fund their buying (2000-2006). As the housing bubble burst and home values sank below outstanding mortgage balances, the consumer turned to his credit cards, as credit card debt hit an all time high both in actual terms and as a percentage of Gross Domestic Product (GDP). Over the last year the clear pattern has been a decline in outstanding credit card balances as consumers have apparently attempted to reconcile the fact that you simply can’t spend more than you earn. Thus, employment becomes the paramount economic indicator, as there is no way to increase consumer spending without a revitalization of the job market and the resultant stability from the decline in unemployment numbers.

As employment numbers improve, the housing market will begin to stabilize. We have still witnessed declining real estate values throughout most of the United States, including the most recent figures released in late August. It makes sense; if you don’t have a job, you can’t pay the mortgage. If you can’t pay the mortgage, you try to sell the house before you find yourself under water on your mortgage, and facing foreclosure. This selling pressure will keep a lid on housing prices for the foreseeable future. Therefore, with both employment and housing remaining under pressure, we can’t expect an economic turnaround as quickly as government officials have speculated. In the face of all of the adversity, the overall economy as measured by the stock markets and commodity markets has managed to stay close to “even” over the last twelve months. From my conversations with individual investors and professional money managers, I have learned that those who have remained calm and attentive to their financial plans have had the best results.

Conversely, those who have reacted too quickly to the volatile swings in the markets have often found themselves out when they should have been in, and in when they should have been out. The weeks and months ahead will present new challenges, as we have seen signs of inflation (oil and other commodity price increases), continued pressure on housing prices, higher and higher government debt ceilings, and an obvious flight to gold as a “safe haven” with prices exceeding $1,900 per ounce in the third week of August. The global economy, which is closely intertwined with our own, does not look much better. Europe continues to struggle with sovereign debt issues in several countries, while China faced its first slowdown in GDP growth in many years. All of these facts weigh heavily on increasing the odds of a “double-dip” recession, which will in turn keep pressure on the financial markets and the potential return on our investments. For those who have laid out a financial plan, particularly a plan which includes the systematic saving of some portion of earnings, the best advice seems to be “stay the course.” Continue to be selective about where your savings dollars go, and seek the advice of professionals in order to maintain a well diversified mix that has the ability to better cushion the shocks of the widely fluctuating markets inherent to recessionary conditions. Even in the worst of economic times there have been market sectors that have outperformed the economy as a whole, and therein we find the opportunities for those with a sound financial plan and some good professional advice.

©Patrick J. Catania 2010
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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