Riding the Financial Roller Coaster

Recent gyrations in the financial markets resulting from the recent downgrade of US government credit by Standard and Poors has been a roller coaster ride for investors. Persistent decreases followed by a sharp increase, then a decrease, and another increase has investors wondering what to expect next. The financial markets have become a roller coaster of volatility. And this roller coaster is not only constrained to stocks. The debt downgrade created a paradoxical result of stoking new fears for widespread default in the euro-zone, and actually channeled more capital toward US treasuries, which pushed down yields.

In addition to this, the housing market is still extremely soft, with very few buyers able to qualify for financing, and very few sellers able to price their property at the market rate, due to being under water on their loans. In addition to this, there is still a persistent hangover of foreclosure inventory that is dragging on the resale of properties. This has created a strange dichotomy in many markets where new construction or default/foreclosure properties are the only inventory that sells. This creates another roller coaster for people attempting to move resale property since the intensity of competition results in lowball offers and excessive demands from buyers that would have been completely unheard of in the past.

What this all comes down to is the fundamental truth that the future is intrinsically uncertain. During the stock market bubble of the late 1990’s and the real estate bubble of the early 21st century, people came to expect continued rapid escalation of their investment assets. The resultant collapse of these bubbles left many people in dire financial condition. This problem was amplified even more so with the most recent bubble, due to the high number of people who had purchase property with high rates of leverage. This meant that when the values compressed, the owner suddenly found themselves ‘upside down’ with more in debt than the market value of their property.

Now that we are in the middle of sorting out the mess from the real estate bubble, people are wondering what to do. This problem is further complicated by the fact that our current economic difficulties are being addressed with many of the same policies that created the last bubble. This has led many to speculate that a new bubble of some sort is in the process of forming. With all of these swirling factors to consider, many investors are befuddled and confused. Most people just want to earn a reasonable rate of return so that they can retire in relative comfort. However, this task is proving to be much more difficult than financial planners make it out to be.

Opportunistic Investing 
In a market environment that is highly volatile, the best results typically come from being opportunistic. This means acquiring investment assets when confidence is low and buyers are distressed. For stock market investors, this means finding companies that are fundamentally strong, and pay good dividends, then targeting them for purchase when market values dip. In this way, investors purchase a stream of future dividend cash flows for a rock bottom price. This strategy can also be employed for growth based companies as well, but it relies exclusively on future value appreciation, which is more volatile, but can also deliver greater total returns.

For property investors, market dips are the best time to acquire income producing real estate assets. This is especially true since the high rates of default and foreclosure are driving many people who used to be homeowners into the renter pool. Over time, this will become a boon for income property investors, as the overall increase in the renter population strengthens rents. It means that investors must deal with the inevitable difficulties that accompany tenants and rental properties. However, many investors are finding that the risk of tenants is preferable to the roller coaster volatility of financial markets.

Dynamic Course Adjustments 
Another key characteristic of success in the current market environment is the ability to change course as the financial landscape evolves. The strategies that worked best in the past may not be optimal in the future. The investments that work the best now may not work the best in 20 years. Astute investors must do more than “follow a system”… they must “create a strategy.” The strategy should be what informs your decisions. The strategy should be bigger than a single investment category, and it should encompass more than simply making money.

The purpose of a strategy starts with what you are attempting to achieve with all of your income producing activities. It could be retirement, it could be a lifestyle, it could be paying for your children to attend college. Whatever the goal is, it is very important to understand that part of your strategy first. The second most important characteristic is your risk tolerance. By and large, the more volatility and hassles you are willing to deal with, the higher rates of return you will be able to achieve. However, these rates of return will not come in a smooth, even stream. In order to achieve the “Big Kid” rates of return, you will need to move beyond packaged investments like mutual funds.

Once your end-state goal and risk tolerance has been defined, then it is time to decide what category of investment and specific opportunities are right for you. The answer to this will most certainly be different for everybody. Thus, it is less important to find the “best” opportunity, and far more critical to find the “right ” opportunity. The way that you will be the most successful in business and in life is to pursue the opportunities that are right for your personality, temperance, and life situation.

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