Where To Invest In 2008?
David Christianson, CFP, R.F.P., TEP
A lot of readers have asked me to suggest where they should invest in 2008.
Let me start off with something easier; like, say, a prediction of how much snow will fall on February 3?
Predicting the future is a risky game. Just ask itravel2000.com, or any economist. Economics is often called “the dismal science” because of the low rate of accuracy in its predictions. At any given time, economists make Environment Canada forecasters look like geniuses.
I'm not an economist (although I minored in it at University), so I'm technically not qualified to give even bad predictions.
With that caveat, however, there are a few things to look out for in the coming year.
Rule number one is to make sure that you have put aside, in liquid, guaranteed investments, any amounts that you might need to spend this year or next. This is especially true if you are retired and living on a fixed income or investment returns.
What we're trying to avoid is the necessity of cashing in an investment when it is down. This is why you never put next summer's vacation fund into stocks or equity mutual funds. Since those investments fluctuate in value, they are best only used with a minimum three-year time horizon, and hopefully five years.
This rule is likely more important this year than most. With the collapse of housing prices in the United States and the expectation of record numbers of mortgage defaults this year, there is a pretty good chance of a recession in the US.
Consumers there have kept the economy going for years now, but they have done it by borrowing money against their homes. With credit tight and house values plummeting, they can't do that anymore.
Offsetting that slowdown, perhaps, is the beneficial effect that a lower US dollar has on US manufacturers and exports. With imported goods getting more expensive for US consumers, they may turn to buying locally. However, my guess is they will simply slow their spending, but the higher prices may still leave the central bank fighting inflation at a time when it needs to be lowering interest rates to stimulate the economy.
In Canada, the strong dollar has had the opposite effect. Consumers are celebrating falling prices, or going across the border to get even better bargains. Imports are increasing, while exporters and manufacturers are struggling.
So why is the Canadian economy in such good shape, in spite of the challenge of a higher dollar? The big factor is the insatiable demand for oil and other commodities. This is driving dollars into Canada, creating enough jobs and tax revenue to offset the slowdown in other areas.
What problems does this concentration and dependence on commodities create?
First is the fear that it might not continue. With prices at all-time highs on oil and near records on other commodities, is there any more upside?
Some professional traders say yes, because of the unprecedented building boom in China and India, and in spite of a slowdown on the American economy, which is still the world’s largest.
The other problem is that oil and mining have become a hugely dominant sector of the stock market, rivalled only by banks and insurance companies. Defensive stocks like consumer goods and health care – traditional safe havens in a slowdown – are nearly non-existent, as are technology stocks. This kind of concentration has always proven risky.
Foreign stock markets provide the opportunity for much more diversification and, presumably, better risk management. Canadian investors can now use the mighty Loonie to purchase these markets at a very attractive price.
Don’t let the recent success of the Canadian stock market and the apparent American basket case economy pull you away from your traditional diversified portfolio. Talk to your advisor this month about the mix that’s right for you, and the best ways to implement your strategy.
Keep an appropriate amount in bonds and other fixed income investments, even though rates are low. Maintain cash reserves for spending needs. Only invest amounts in stocks and equity mutual funds that you can commit for 5 years, and stay diversified internationally.
I can’t tell you precisely when it will pay off, but I’m pretty sure it will.
Happy New Year!
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This article originally appeared in the Winnipeg Free Press on Friday, January 4, 2008.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.