Monday, December 10, 2007

Sub-prime Mortgage Mayhem: Could it Effect You

by Nancy Osborne, COO of ERATE
Your credit rating is so far from sub-prime it's practically super-prime, so you've never come even close to having personal experience with the notorious sub-prime lending universe, in fact it's another planet altogether. Listening to the updates on the news regarding the latest sub-prime casualty or reading about it is seemingly the only exposure you've had to the disaster or is it? It might take some investigating on your part but chances are you have been impacted by the problem more than you think. The financial aftermath of the subprime meltdown has touched the far corners of the financial world as stocks have been hard hit and rare would be the bond fund that did not own any mortgage-backed securities. It would be difficult to avoid having some exposure to the problem if you are invested any mutual funds which contain the terms "high-income" or "high-yield" in their fund name. And if you own a financial services sector mutual fund, you can count on having taken a hit, in fact it is important to note that the financial services area now accounts for an almost 20% weighting within the S&P 500. Services related to the real estate industry have become such a substantial part of the U.S. economy and it's over all performance that it would be next to impossible to escape being touched by the problem in some way. Real estate values and consumer confidence have now become flip sides of the same coin. As real estate has surged in recent years it has become the linchpin of economic activity, so it may now be a far greater component of your investment portfolio than you even realize.

What can you do to protect yourself from the risk of the sub-prime industry's woes?

  • The first step would be to check your asset allocation to determine if your investment's exposure to real estate and its related industries has ballooned into too large a percentage of your over all portfolio. If this is the case then it may be time to make some investment changes, shifting your positions into other investment categories.

  • Consider taking a cash position in the market. Don't hesitate to increase your cash holdings and ride out the market gyrations and volatility from the sidelines. You can resume executing your investment plan, as well as adjusting your asset allocation, once things have settled down and the market has its bearings again.

  • As the economy wavers on recession, now may be the time to move into investment sectors which perform well during times of a sluggish economy. You may want to adopt a defensive strategy when picking stocks moving forward.

  • Take the opportunity to purchase blue chip companies that may be dipping in relative sympathy to their market sector. During times of uncertainty the baby is occasionally thrown out with the bathwater so to speak, be on the lookout for just such opportunities and bargains.

Always consult with your tax or financial advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

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