Where to Invest: Four Strategies for 2008

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Since September, we have experienced an extraordinary level of volatility in the financial sector, with generally favorable stock market returns offset by the depreciation of home prices. In 2008, expect to see slower growth in the U.S. economy. Following a weak start to 2007, the U.S. economy rebounded strongly in the second quarter, growing by 3.8 percent at an annualized rate. However, with housing- market indicators very weak and consumer sentiment, the Institute for Supply Management’s business surveys and durable goods orders all declining, the International Monetary Fund lowered its projection for U.S. growth in 2008 to 1.9 percent, a 0.9 percentage-point drop from an earlier forecast. Also, we will likely see continued fallout from the overextension of subprime mortgages to risky borrowers, higher inflation and, for the first time in history, a $100-per-barrel oil price. Despite this gloomy scenario, there are quite a number of places to invest for positive return. Here are four strategies to help you stay on track with your investment goals.

Go global. According to the Inter-national Monetary Fund’s World Economic Outlook, the global economy is projected to grow a robust 4.8 percent in 2008—China alone is expected to grow 10 percent—compared to the United States, which is projected to grow a paltry 1.9 percent. To achieve solid stock market returns, you will need to go global. From an asset allocation standpoint, consider increasing your non-U.S. equity holdings by 10 percent to 20 percent and correspondingly decrease U.S. equity holding by a comparable amount. Two Morn-ingstar 5-star funds that you may want to consider are the Acadian Emerging Markets Fund (AEMGX) and the Metzler/Payden European Emerging Markets Fund (MDYMX). Acadian achieved a year-to-date return of 49.98 percent as of November and a five-year annualized return of 44.22 percent, while Metzler/Payden saw year-to-date returns of 30.17 percent and a three-year annualized return of 42.6 percent.

While these two emerging market funds are solid for non-U.S. exposure, if you want to stay closer to home, you should consider investing in U.S. companies that earn a large percentage of their revenues from the global markets. U.S.–based companies in this category include Caterpillar, Boeing, John Deere, IBM, GE, and Proctor and Gamble. One Morningstar 5-star fund that captures many of these companies is the American Fund Fundamental Invest-ments Fund (AFIFX), which has a year-to-date return of 14.24 percent and a five-year annualized return of 18.12 percent. Do not expect to receive 30 percent to 40 percent returns from your international portfolio. Billions of dollars are flowing into these markets as we speak, which might make high returns dicey; but low double-digit returns will be achievable and place you on track to have favorable portfolio returns.

Buy real estate. The subprime mortgage meltdown and associated property foreclosures have been an absolute nightmare for many investors and painful for many families, but this phenomenon has also created the best real estate buying opportunity this decade. For those with solid credit, stable incomes and assets, 2008 will present tremendous real estate buying opportunities. Tight lending requirements and the possibility of further Federal Reserve Bank interest-rate cuts will also make for favorable financing rates. However, in a slowing economy you do not want to stretch. Only purchase an investment property or a new home if you are absolutely sure that you have enough cash reserves to protect yourself if something goes wrong.  Avoid the emotion of home ownership. In this environment, go by the numbers.

Choose natural resources. Wheth-er oil over $100 per barrel or gold above $800 per ounce, 2008 will continue to see price increases for natural resources. This bodes well for investors in the sector. Two 4-star funds that you may consider adding to your portfolio are Ivy Global Natural Resource Fund (IGNAX) and U.S. Global Investors Global Resources Fund (PSPFX). Ivy Global Natural Resources has a return of 44.05 percent and a five-year annualized return of 35.44 percent, while the Global Investors Global Resource Fund has generated a year-to-date return of 43.80 percent and a five-year annualized return of 47.60 percent. Much like global investments, the run up in commodities prices during the past few years will likely result in reduced returns from this sector in 2008. Still, natural resources will be a solid source of investment returns and should be added as a long-term allocation to your asset mix.

Reduce debt. If you are not comfortable with the volatility of the markets, you may consider cleaning up your personal balance sheet by reducing all excess debt. In a slowing economy, debt reduction makes a lot more sense than in a growth economy where the cost of missing an opportunity is much higher. Remember that while wealth creation is more a function of asset expansion than debt reduction, it would be wise to consider using 2008 as the year you eliminate your debt and position yourself to participate in future economic opportunities.

2008 will prove to be a great year for investors who are focused, nimble and well positioned to take advantage of opportunities as they materialize.