To suggest to you that we are living through some frightening and uncertain times would be an understatement. The near collapse of U.S. and international credit markets has shaken governments throughout the world. The massive and sudden crisis in worldwide banking has brought about the collapse of major financial institutions and tested the ability of policymakers globally to craft answers for restoring confidence in the credit markets. Few market experts are eager to participate in the business of investment predictions right now, and some blame the failure of regulators at the Fed and the Treasury for failing to recognize the severity of the credit collapse until the crisis hit.
Against this backdrop, and the effect of uncertainty on the stock market, it’s no wonder that motions and tensions are running high as Congress tries to make sense of Treasury Secretary Paulson and Federal Reserve Chairman Bernanke’s plans to free up credit channels snarled by faltering lending institutions and deteriorating public confidence. Whatever the final outcome, the consensus is that Wall Street will never be quite the same, and that we are in the midst of a historic situation—a turning point— for which we have no real precedent. Here’s what leading observers are suggesting:
- Some analysts –despite the frustrating rate of progress of legislative negotiations--are happy to see that the Treasury and Federal Reserve have finally stopped their piecemeal approach in favor of a cohesive plan. They view the present disarray as predominately financial rather than economic, and, with this in mind, believe that the present crisis might follow the pattern of the S&L crisis and real estate debacle of the late 1980s and early 1990s after which we saw a lively resurgence following a major federal intervention.
- Other commentators believe that the next phase of the current crisis is impossible to predict. They acknowledge we’ve weathered the collapse of the real estate bubble and S & L crisis of the late 1980s, but that no past event is quite like current conditions. They say investors should focus on survival by trying to hedge against extreme circumstances, and forget about “making a killing” for a while. In survival mode, they urge investors to consult with their financial advisors to ensure that their portfolio is diversified to meet today’s challenges –that the holdings spread the risk through a variety of markets and also that the portfolio is structured to weather a variety of possible scenarios—e.g. major inflationary pressures or further declines in the dollar.
- Other experts suggest that investors worried about impending retirement plans might reduce their risks by balancing their portfolios with more global holdings. Some advisors believe that, rather than trying to predict winners, the best risk-adjusted returns may be found by looking at the market capitalization weightings of the worlds’ financial markets.
No doubt about it, these are scary times for investors, but history shows that the least helpful reaction to it is panic. If you sit tight and protect your holdings as best you can whilst the tumult lasts, the pros believe you’ll be able to leverage your funds when the market recovers.