Res­cue plan for in­di­vid­ual in­vestors

The Covington News - - News -

If you’ve watched the news from Wall Street and Wash­ing­ton the past few days, you’ve seen a hefty amount of drama. But in the end, what will it mean to you?

Law­mak­ers have agreed on a $700 bil­lion plan, called the Emer­gency Eco­nomic Sta­bi­liza­tion Act of 2008, to re­vive the credit mar­kets and re­store the flow of credit to the U.S. econ­omy.

The leg­is­la­tion will, among other pro­vi­sions, give the Trea­sury Depart­ment the abil­ity to pur­chase up to $700 bil­lion in mort­gage­backed se­cu­ri­ties and other trou­bled as­sets from banks and fi­nan­cial firms, though some of this spending au­thor­ity will be sub­ject to Con­gres­sional ap­proval.

This res­cue pack­age has both sup­port­ers and de­trac­tors. Its pro­po­nents claim that you, as a tax­payer, will ul­ti­mately reap re­wards when the Trea­sury even­tu­ally sells the cur­rently dis­tressed as­sets for a profit. How­ever, while no one can say for sure when, or if, this will hap­pen, it does seem likely that the bailout could have some real ben­e­fits for you as an in­vestor.

Why? Be­cause one of the most im­por­tant goals of the bailout is to help “un­clog” the credit mar­kets and put more cash back into our fi­nan­cial sys­tem. The sub­prime mort­gage cri­sis has sucked an enor­mous amount of liq­uid­ity from our mar­kets; without this liq­uid­ity, banks have be­come un­will­ing, or un­able, to ex­tend credit to con­sumers and busi­nesses. When busi­nesses can’t get credit, they can’t ex­pand their op­er­a­tions — and that makes it hard for them to make a profit.

As an in­vestor, of course, you are looking for prof­itable com­pa­nies in which to in­vest. So, to the ex­tent that an in­fu­sion of liq­uid­ity may help the for­tunes of many busi­nesses, you now may face a brighter in­vest­ment hori­zon.

Fur­ther­more, the bailout may calm the fi­nan­cial mar­kets — and calmer fi­nan­cial mar­kets are more con­ducive to long-term in­vest­ing. As an in­vestor, you may find it hard to stick to your strat­egy when you see the stock mar­ket show gi­ant gains one day, fol­lowed by huge losses the next.

None­the­less, as you look ahead, don’t be sur­prised if some volatil­ity con­tin­ues, al­though it will hope­fully be less ex­treme than what we’ve seen.

For­tu­nately, you can take ef­fec­tive action against mar­ket fluc­tu­a­tions, what­ever their size, by di­ver­si­fy­ing your in­vest­ments.

Talk to your fi­nan­cial ad­vi­sor about how to di­ver­sify your port­fo­lio in a way that’s ap­pro­pri­ate for your risk tol­er­ance and time hori­zon. Be aware, how­ever, that di­ver­si­fi­ca­tion, by it­self, can­not guar­an­tee a profit or pro­tect against a loss.

Also, keep looking for qual­ity in­vest­ments. Dur­ing mar­ket down­turns, even qual­ity stocks can lose value. But th­ese same stocks of­ten re­cover quickly when the mar­ket turns around. Look for good, solid com­pa­nies whose prod­ucts are com­pet­i­tive and whose man­age­ment has enun­ci­ated a strat­egy for fu­ture growth.

Here’s the bot­tom line: The gov­ern­ment’s res­cue plan may well help in­vestors. But by fol­low­ing proven strate­gies, such as di­ver­si­fy­ing your hold­ings and in­vest­ing for qual­ity, you can build a port­fo­lio that can nav­i­gate even the chop­pi­est fi­nan­cial wa­ters — without hav­ing to bail your­self out.

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