If you’ve watched the news from Wall Street and Washington the past few days, you’ve seen a hefty amount of drama. But in the end, what will it mean to you?
Lawmakers have agreed on a $700 billion plan, called the Emergency Economic Stabilization Act of 2008, to revive the credit markets and restore the flow of credit to the U.S. economy. The legislation will, among other provisions, give the Treasury Department the ability to purchase up to $700 billion in mortgage-backed securities and other troubled assets from banks and financial firms, though some of this spending authority will be subject to Congressional approval.
This rescue package has both supporters and detractors. Its proponents claim that you, as a taxpayer, will ultimately reap rewards when the Treasury eventually sells the currently distressed assets for a profit. However, while no one can say for sure when, or if, this will happen, it does seem likely that the bailout could have some real benefits for you as an investor.
Why? Because one of the most important goals of the bailout is to help “unclog” the credit markets and put more cash back into our financial system. The subprime mortgage crisis has sucked an enormous amount of liquidity from our markets; without this liquidity, banks have become unwilling, or unable, to extend credit to consumers and businesses. When businesses can’t get credit, they can’t expand their operations — and that makes it hard for them to make a profit.
As an investor, of course, you are looking for profitable companies in which to invest. So, to the extent that an infusion of liquidity may help the fortunes of many businesses, you now may face a brighter investment horizon.
Furthermore, the bailout may calm the financial markets — and calmer financial markets are more conducive to long-term investing. As an investor, you may find it hard to stick to your strategy when you see the stock market show giant gains one day, followed by huge losses the next.
Nonetheless, as you look ahead, don’t be surprised if some volatility continues, although it will hopefully be less extreme than what we’ve seen.
Fortunately, you can take effective action against market fluctuations, whatever their size, by diversifying your investments. Talk to your financial advisor about how to diversify your portfolio in a way that’s appropriate for your risk tolerance and time horizon. Be aware, however, that diversification, by itself, cannot guarantee a profit or protect against a loss.
Also, keep looking for quality investments. During market downturns, even quality stocks can lose value. But these same stocks often recover quickly when the market turns around. Look for good, solid companies whose products are competitive and whose management has enunciated a strategy for future growth.
Here’s the bottom line: The government’s rescue plan may well help investors. But by following proven strategies, such as diversifying your holdings and investing for quality, you can build a portfolio that can navigate even the choppiest financial waters — without having to bail yourself out.