As stock markets plummet and interest rates are expected to increase in response to the Standard & Poor's downgrade of U.S. credit, how do investors and consumers, large or small, protect against the unpredictable days ahead?
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Experts have weighed in with a variety of opinions, but finance and economics which are both science and art, and therefore, open to various interpretations. With today's current environment, the markets have all the predictability of a wild card, but for the small investor and consumer, several protective moves should be considered. These are not guaranteed to be foolproof, but some experts have recommended them.
Consumers intending to buy large ticket items - major appliances or automobiles - should consider buying now before interest rates spike. Buying a house or condo now may also be a good idea, if the price is right, because eventually mortgage rates are expected to increase.
Another smart move is to pay off as much debt now as you can afford before rates go up and monthly payments increase.
Stock portfolios should also be re-evaluated with a view toward a re-allocation of assets favoring growth stocks and a move away from stocks in steep decline, but a word of caution here. Billionaire, Warren Buffett, known as the Oracle of Omaha and one of the world's most successful investors, has often said, "Our favorite holding period is forever." That remark reflects Buffett's investment strategy of buying value stocks and holding them long term. Will this strategy be effective in a post-downgrade economy? Many knowledgeable investors have differing opinions on the answer.
Experts have disagreed on strategies for smaller investors worried about their 401k or IRA accounts. One faction says retirement funds in money-markets are relatively safe and could be kept in these vehicles. Others advise moving assets temporarily to cash or cash equivalents. The low yields on money-markets aren't worth the risk say several experts, but before cash is removed from any tax exempt retirement vehicle, consult an accountant or tax lawyer on tax liability and withdrawal penalties. Many advisers discourage that move. (The list of prohibited investment vehicales is short, but it's important to know what is off limits. For more, see 5 Investments You Can't Hold In An IRA/Qualified Plan.)
A Wall Street Journal article recently reported the following advice from investment portfolio managers, fixed-income strategists and analysts.
"As the stock market sells off, buy growth companies."
"Don't invest heavily in anything until markets stabilize. High-rated corporate bonds are a safe place to put money rather than in Treasuries or to keep in cash deposits."
"Keep some assets allocated to stocks and commodities, and move assets out of money markets into cash."
"Don't change your long-term investment plan. Treasuries are still safe, and U.S. debt will eventually be upgraded to its triple-A rating."
Gold could be a good asset to hold as a hedge against inflation and as a growth commodity. Recently, gold flew past $1,700 an ounce. As recently as the beginning of June the precious metal was just $1,500 an ounce, an almost 9% gain in just two months. But watch for it to hit a ceiling and bounce downward when the economy improves. (For more on gold, see Gold: The Other Currency.)
Some analysts are cautiously bullish and see market volatility in the post-downgrade economy as an opportunity to buy stocks at bargain prices.
A number of investment newsletters, financial advisers, and knowledgeable media commentators and columnists have advised investors to consider one of the still fastest-growing sectors of the economy: e-commerce. This would include firms like Amazon.com, Inc. and Google with a large market share and continued growth.
Continued Chinese economic growth augurs well for firms which export to that robust emerging market, including manufacturers of heavy machinery, mining equipment and technology companies.
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The Bottom Line
So although economic times are tough, investment opportunities are available and assets may be protected in a variety of ways.
But no matter what investors and consumers do to protect their assets, in the short term at least and perhaps long term as well, America faces an unpredictable economic future and that will affect everyone and their investments and buying habits.
If the interest rate on Treasuries rises by just one percent, the U.S. budget deficit will increase by $1.3 trillion over the next 10 years. An increase of that magnitude would eliminate the debt reductions proposed in the recent agreement between the Senate and Congress and we'd be back to where we started. (For more on the U.S. budget deficit, see Breaking Down The U.S. Budget Deficit.)