The Big Picture
Edition: January 2009 - Vol 17 Number 01
Provided by John Sammut and RBC Wealth Management
The year 2008 will go down as one of the bloodiest financial market collapses in economic history. A new year provides an opportunity to take a hard look at where you stand financially, how you got there, and outline steps to move forward. Some thoughts as 2009 begins:
Don't ignore the economic reality
The events of 2008 were a long time in the making. Fundamentally, what has unfolded is a massive unwinding of borrowed money on a global scale; the resulting "payback" of decades of reckless lending and credit creation. At its essence, the root cause can be blamed on artificially low interest rates which fed a "borrowing binge" by consumers. As the number of failing financial institutions began to escalate, governments worldwide embarked on a massive effort to intervene to prevent further failures and risks to the financial system.
Unfortunately, the monetary authorities are trying to solve a debt problem by creating more debt. They refuse to allow institutions that took on too much risk to fail. The numbers are changing so fast, it's difficult to pull an accurate total. Rough estimate as of Nov. 28, 2008: $3.65 trillion. (Source: The Daily Reckoning)
Certainly, we are facing serious inflationary consequences down the road as a result of these government actions. However, there are steps that investors can take to protect their capital and rebuild their wealth:
Take a macro view: look at the big picture in terms of the global economy as well as your own financial circumstances.
Avoid single stock risk: diversify intelligently and effectively and avoid unpleasant surprises.
Look for industries and sectors whose fundamentals are unimpaired and share prices have been discounted.
Look for opportunities to increase yield. Many stocks, both in the United States and abroad, are offering double-digit dividend yields.
Pay off high interest debt today, look for opportunities to refinance at historically low interest rates
Beware of the next bubble: U.S. government bonds are trading at record highs. On Nov. 28, 2008, the yield on the 10-year U.S. Treasury Bond reached the lowest level in 50 years (2.82 percent). When the bond bubble bursts, it's going to be extremely painful for many.
You can protect your portfolio and even profit during these uncertain economic times, but it's going to take unconventional thinking, courage, staying power, thrift, and a healthy dose of humility to succeed. The key is to avoid costly investment mistakes, keep a cool head, and look to capitalize on long-term opportunities that will preserve and enhance wealth.
About The Author
John Sammut helps individual investors, families and corporations protect their purchasing power and improve investment results. You can reach Sammut by telephone at (800) 343-3036, or visit him at www.johnmsammut.com
The opinions expressed in this report are those of the author and are not necessarily the same as those of RBC Wealth Management or its research department. RBC Wealth Management did not assist in the preparation of this report and makes no guarantees as to the accuracy or the reliability of the sources. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis of investment decisions. Clients should work with their financial consultant to develop investment strategies tailored to their own financial circumstances.