Headlines sweep the media outlets on a daily basis, alerting us to the unsettled state of financial markets. From rising inflation and recession to volatile stock prices, and uncertainty regarding real property, what is an investor to do? Making sound financial decisions during these volatile times can be challenging, but the right plan can better position investors for this changing market climate.

“The near-term prospect of a significantly sluggish economy creates opportunities for equity investors,” says Dr. Gary Koppenhaver, economist and head of the Finance, Insurance and Law departments at Illinois State University. “Although consumer spending is likely to be restrained by tight lending standards, uncertain real estate values and high energy costs, the Federal Reserve is likely to take an active role in supplying surplus liquidity to institutional and private investors.

“The equities of selective companies outside the financial sector with a solid track record of cash flow and dividends should become reasonably priced as the overall stock market seeks to regain its footing. Once the housing market stabilizes and inventories of unsold homes return to typical levels, the U.S. economy will likely reward those investors for their patience. The next asset price ‘bubble’ to pop may well be in treasuries, as they have benefited from a widespread and sustained flight to quality.”

The Department of Labor has announced that consumer prices rose 4.5 percent from 2006 to 2007. For retirees living on fixed incomes, this may mean it’s time to “tighten the belt.” For mid-career families accumulating net worth, efforts to adequately save are deterred by rising prices at the grocery store, the gas pump and even the extracurricular activities for the kids! Now what?

Here is a fairly simple process to help make sense of financial circumstances in any economic cycle, and to ensure that those working to accumulate net worth will remain on a progressive path of profitability:

• Establish clear goals and objectives with dollar amounts and dates.
• Build a spending plan to incorporate cash needs over the next couple of years (big ticket items such as cars, appliances, education).
• Build a cash flow reserve account separate from your longer term investments to handle the identified spending needs.
• Use market declines to “harvest” tax losses so they can be used to shelter gains later in the year.
• Diversify longer term investments so that some assets will behave differently than the general securities markets (small positions, gold, commodity funds, natural resources, etc.) to avoid experiencing the same volatility as the overall market. There should always be a few areas of an investor’s portfolio that aren’t doing well. Otherwise, you are not diversified enough.

“Our primary intent is to protect capital by actively managing around the risks we identify in the global capital markets,” says Mark Griffin, chief investment officer of Clifton Gunderson Financial Services.
For more than 30 years, I have counseled individuals of all ages on how to manage their finances during periods of inflation, recession and stock market volatility. The current market situation is being portrayed by some as “different,” but experience tells us otherwise.

Experienced investment professionals know how to deal with these cycles. Market swings are likely to continue. The key is to learn how to stay afloat amongst the waves. Proper identification of goals, building adequate cash reserves, managing tax efficiency and intelligent, disciplined diversification, will allow investors to sit back and enjoy the ride. IBI