Financial markets ended the week with continuing concerns about the sub prime mortgage crisis, although Federal Reserve Chairman Ben Bernanke vowed to "act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets."
Mr Bernanke refused, however, to "protect lenders and investors from the consequences of their financial decisions."
In my opinion, the Federal Reserve has it right. Their responsibility rests with the protection and overall health of the economy, not necessarily companies and individuals. However, Mr. Bernanke realizes the severity of the credit pinch, and has vowed to protect America from a downward spiral.
I eventually expect the Federal Reserve to lower the federal funds rate, possibly during their meeting on September 18th. However, market volatility will continue in the weeks leading up to the decision, so protect yourself. Here are a few simple ways.
1. Don't just dive into stocks with cash. Cautiously begin dollar cost averaging in index funds.
2. Let things settle in the real estate market before buying. Real estate is typically a good way to diversify, but don't put yourself in an unneeded credit crunch until the market stabilizes.
3. Keep cash on hand. Give yourself some flexibility to jump on a great buy. In volatile times, minor market interruptions present golden opportunities.
4. Stay strong. Savvy investors are not selling just because the markets lack stability. A portion of a portfolio is still buy and hold forever.
Have a great Labor Day weekend!