Volatility, Credit Crunch and Investment Planning:

What a difference a month makes. With all the excitement of August, it is hard to believe that the Dow Jones Industrial Average began and ended the month at approximately the same level. What really matters to most investors was what to make of those days in between though.

One of the first things to learn about investing is the humility to know that you know very little. It is human nature to be complacent when the market is rising and panicked when it falls. This is especially true with today's constant media focus. Things are always brightest at the top and darkest at the bottom. Ever wonder why the news channels bring out their bullish guests when the market is hitting highs and their bearish guests when the market is diving?

History has shown us that corrections happen, economic cycles happen and even recessions happen. It is part of economic reality. History has also shown us that what seem like major events are minor when looking at historical charts of the Dow or S&P index. (see link on the left)

Credit Crunch?

The month of August brought us a host of financial terms in the media: liquidity crisis, credit crunch, leveraged hedge funds, etc.

A credit crunch is when banks stop lending money, at this point banks have become more risk adverse but are still willing to loan to folks with good credit. The problem comes when you experience a snow ball effect as we had in August where there was a sudden shift in lending requirements and the ability to package and resale loans. This had a ripple effect throughout Wall Street which has deep ties to the mortgage and lending markets. Banks, Brokers, Hedgefunds and Private Equity funds were all affected, and since these big players form the financial backdrop of our economy it was felt everywhere.

Investment Planning:

With the realization that timing the market is difficult, the best thing to do is to have an investment plan. Even in a correction or recession certain sectors hold up and even gain. (think homebuilding and defensive industries from 2000 to 2002). Having an asset allocation model and a tiered strategy to your investing is one way to get around timing the markets.

So what is in store for the remainder of the year? It seems that volatility is back and at this point we could go either way. Global growth and technology are holding up but we have yet to see what residual fallout is in store from the credit issues. Let's get through September and see what happens.