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When Times Are So Scary, Opportunities Emerge

As the nation struggles through a severe financial crisis, you’re undoubtedly worried about your financial security and the safety of your nest egg. But this is no time to sell stocks or make wholesale changes to a well-balanced portfolio that is aligned with your goals and investment time horizon.

Remember that short-term volatility isn’t a big worry when you are invested for the long term. And though stocks have underperformed bonds during recent years, over many decades equity investments have almost always come out on top.

Even if the nation is in a recession, there is a lot in the economy that is doing pretty well. Unemployment, though rising, hasn’t exploded, interest rates are still low, and inflation remains under control despite higher energy and food prices. The economy is resilient and the federal government is taking steps to get past the credit crunch.

As for stock prices, much of today’s and tomorrow’s bad news already has been factored into the market. Selling stocks or mutual funds after a decline simply means getting out at a low point. Nervously entering and exiting the market heightens your risks and lowers your returns.

So what should you do? Stay the course and remain diversified, but ask your advisor about adjusting your portfolio to take advantage of investments more likely to produce solid returns during a bear market.

Here are several potential opportunities:

  • Before their recent declines, global growth trends had sent commodity prices soaring for energy, agricultural products, and precious metals. Now, lower prices can give volatility-tolerating investors a good entry point for gains once the economy stabilizes. Commodities can also serve as a hedge against inflation.
  • Yields on Treasuries dropped as shell-shocked investors fled to the safety of government bonds. But the market fallout should reiterate the importance of broad portfolio diversification—and that includes low-yielding treasuries. Allocation back into stocks and corporate bonds, while prices are low is also important.
  • Though not quite as safe as Treasuries, municipal bond funds can deliver income that’s not subject to federal and, sometimes, state income taxes. Muni prices have fallen and yields have risen, in some cases nearing the yields of corporate bonds even before figuring in munis’ tax advantage. But tread with caution: there are concerns about the worsening financial health of local and state governments along with municipal bonds’ lack of liquidity.
  • Yields on corporate bonds, too, may be attractive today, when companies must offer higher rates in order to get the financing they need. Though default risks are also high, taking well-considered risks can improve potential returns.
  • With the Federal Reserve likely to keep interest rates low, inflation could continue to be a concern, and Treasury Inflation-Protected Securities, or TIPS, can help insulate you against that risk. TIPS’ principal increases in step with rises in the Consumer Price Index, and at maturity the buyer receives either the adjusted principal or the original principal, whichever is greater.
  • Domestic stocks began their fall before international stocks and could be first to recover. Also, as overseas economies weaken, the dollar may resume its recent climb, reducing the value of foreign holdings for U.S. investors.
  • European bonds may be a good bet as European countries drop interest rates in order to boost ailing economies. Declining interest rates favor bond holders.
  • U.S. small-cap stocks may be preferable to large-caps because larger, multinational companies tend to have more exposure to international financial woes. Also, small caps tend to rebound first after a recession.
  • Investing in surviving financial services firms might be worth considering, though only for those who can tolerate risk in a sector undergoing profound, unpredictable changes, and who have an advisor that has studied this sector significantly.

These views represent an appraisal of possible events. Outcomes and performances are not guaranteed. The investments discussed may go up or down in value and are not suitable for all investors. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs, and accounts specifically to determine what is right for you. You should consider any investments objectives, risks, charges, and expenses carefully before you invest. Information regarding potential investments, including a fund’s prospectus if required, contains this and other information and should be read carefully before investing. Prospectuses and information may be obtained from your advisor or from the issuer directly.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.


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