The Big Picture: Maintaining perspective during tough economic times

2008 will go down as one of the bloodiest financial market collapses in economic history. A new year gives us an opportunity to take a hard look at where we stand, how we got here, and outline steps to move forward financially. Some thoughts as we begin 2009:

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 November 28, 2008: $3.65 Trillion. (Source: The Daily Reckoning)

Be opportunistic
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 where fundamentals are unimpaired and share prices have been discounted.
• Look for opportunities to increase yield. Many stocks, both in the U.S. 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 US 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.

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 on the Web 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.