Volatility, Credit Crunch
and Investment Planning:
What a difference a month makes. With all the
excitement of August, it is hard to believe that
the Dow Jones Industrial Average began and ended
the month at approximately the same level. What
really matters to most investors was what to make
of those days in between though.
of the first things to learn about investing is
the humility to know that you know very little.
It is human nature to be complacent when the market
is rising and panicked when it falls. This is
especially true with today's constant media focus.
Things are always brightest at the top and darkest
at the bottom. Ever wonder why the news channels
bring out their bullish guests when the market
is hitting highs and their bearish guests when
the market is diving?
has shown us that corrections happen, economic
cycles happen and even recessions happen. It is
part of economic reality. History has also shown
us that what seem like major events are minor
when looking at historical charts of the Dow or
S&P index. (see link on the left)
month of August brought us a host of financial
terms in the media: liquidity crisis, credit crunch,
leveraged hedge funds, etc.
credit crunch is when banks stop lending money,
at this point banks have become more risk adverse
but are still willing to loan to folks with good
credit. The problem comes when you experience
a snow ball effect as we had in August where there
was a sudden shift in lending requirements and
the ability to package and resale loans. This
had a ripple effect throughout Wall Street which
has deep ties to the mortgage and lending markets.
Banks, Brokers, Hedgefunds and Private Equity
funds were all affected, and since these big players
form the financial backdrop of our economy it
was felt everywhere.
the realization that timing the market is difficult,
the best thing to do is to have an investment
plan. Even in a correction or recession certain
sectors hold up and even gain. (think homebuilding
and defensive industries from 2000 to 2002). Having
an asset allocation model and a tiered strategy
to your investing is one way to get around timing
what is in store for the remainder of the year?
It seems that volatility is back and at this point
we could go either way. Global growth and technology
are holding up but we have yet to see what residual
fallout is in store from the credit issues. Let's
get through September and see what happens.