Look for Opportunities in Volatile Markets

Media headlines during the past few months have included frightening descriptions of financial woes worldwide. Whilst we believe we may still see bad news in the months ahead, we think these headlines are scarier than the reality. Remember, the markets have experienced similar times in the past. Investors who owned quality investments in a diversified portfolio and remained invested usually benefited because each period of stock market decline has been followed by a rebound.

Q. Shares have tumbled this year. How much longer will it last?
A. No one knows for certain, but the volatility we’ve seen is not unusual. The biggest source of weakness continues to be financial services. There are still loans, particularly related to housing in the UK and US, which are likely to fall into arrears and potentially default. In addition, the potential for lower-than-expected earnings growth may dampen share prices because of the slowing economic growth in the UK, Europe and North America.

If you are waiting for shares to resume their general upward tendency, you may miss the current opportunity to buy quality investments at lower prices. We’d recommend investors consider adding shares, either individually or in mutual funds (unit trusts). The 13% decline in the FTSE 100 since October 2007 has made many attractively valued.

Q. What equity investments do you recommend?
A. UK companies in the FTSE 100 that increased their dividends every year for the past 10 years had an annual average return of 13.5% compared to 10.4% for those that paid dividends but did not raise them annually.* We’ve also found similar results in other countries. So consider adding companies that have a track record of raising their dividends annually.

If you already own equities, you might consider adding fixed-income investments to balance your portfolio. Many corporate bond yields are higher today than they were a year ago. As a result, quality bonds offer attractive returns if you need reliable income. We recommend you speak with your Edward Jones financial adviser as well as your tax adviser to evaluate which investments may be appropriate for your situation and goals.

Q. Will house prices fall?
A. In some places they have already declined, and they are likely to continue falling, particularly if the economy weakens further. We suggest caution if your portfolio is overweighted in property. Both commercial and residential property prices have weakened due to restrictive lending standards and concerns about the economy. We recommend that you place only a small portion of your portfolio in property investments.

Q. Is inflation a problem?
A. Prices of petrol and food have risen recently, making inflation appear higher than it actually is. Frequently purchased items have generally had greater price increases than those bought less often. The Bank of England (BOE) uses the consumer price index (CPI) as a measure to target a 2% inflation rate. The CPI increased 2.5% during the past year in February, down from 3.1% in April 2007. However, it is projected to rise above 3.0% later in 2008 and then subside again.

Until recently, the CPI remained low due to falling prices for imported products, restrained wage increases and appropriate actions by the BOE to restrain monetary policy and slow growth. However, several factors have contributed to the recent rise in inflation, including:

Higher prices for food, fuel and other commodities
Higher taxes on alcohol
The weakening pound

We believe most of these increases will likely be short term and thus unlikely to result in continued higher inflation.

Q. What steps should long-term investors take?
A. Don’t let the headlines affect your investment decisions. Remember to stay invested and remain calm. There are opportunities when the stock market declines. We think share prices for many quality companies have declined whilst their earnings are expected to continue to grow, suggesting they’re attractively valued. Also consider fixed-income investments to balance your portfolio, if needed. Some corporate bond prices have declined, which increases their yield. To help you decide whether to add or remove investments from your portfolio, contact your financial adviser and ask for a portfolio review.

Kate Warne, Ph.D., CFA
Market Strategist

*Source: Bloomberg

Past Performance is not an indication of future results.

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News for Investors Ideas to Invest In Calculators Edward Jones Perspectives Raising a Money-Smart Child	Look for Opportunities in Volatile Markets Media headlines during the past few months have included frightening descriptions of financial woes worldwide. Whilst we believe we may still see bad news in the months ahead, we think these headlines are scarier than the reality. Remember, the markets have experienced similar times in the past. Investors who owned quality investments in a diversified portfolio and remained invested usually benefited because each period of stock market decline has been followed by a rebound. Q. Shares have tumbled this year. How much longer will it last? A. No one knows for certain, but the volatility we’ve seen is not unusual. The biggest source of weakness continues to be financial services. There are still loans, particularly related to housing in the UK and US, which are likely to fall into arrears and potentially default. In addition, the potential for lower-than-expected earnings growth may dampen share prices because of the slowing economic growth in the UK, Europe and North America. If you are waiting for shares to resume their general upward tendency, you may miss the current opportunity to buy quality investments at lower prices. We’d recommend investors consider adding shares, either individually or in mutual funds (unit trusts). The 13% decline in the FTSE 100 since October 2007 has made many attractively valued. Q. What equity investments do you recommend? A. UK companies in the FTSE 100 that increased their dividends every year for the past 10 years had an annual average return of 13.5% compared to 10.4% for those that paid dividends but did not raise them annually.* We’ve also found similar results in other countries. So consider adding companies that have a track record of raising their dividends annually. If you already own equities, you might consider adding fixed-income investments to balance your portfolio. Many corporate bond yields are higher today than they were a year ago. As a result, quality bonds offer attractive returns if you need reliable income. We recommend you speak with your Edward Jones financial adviser as well as your tax adviser to evaluate which investments may be appropriate for your situation and goals. Q. Will house prices fall? A. In some places they have already declined, and they are likely to continue falling, particularly if the economy weakens further. We suggest caution if your portfolio is overweighted in property. Both commercial and residential property prices have weakened due to restrictive lending standards and concerns about the economy. We recommend that you place only a small portion of your portfolio in property investments. Q. Is inflation a problem? A. Prices of petrol and food have risen recently, making inflation appear higher than it actually is. Frequently purchased items have generally had greater price increases than those bought less often. The Bank of England (BOE) uses the consumer price index (CPI) as a measure to target a 2% inflation rate. The CPI increased 2.5% during the past year in February, down from 3.1% in April 2007. However, it is projected to rise above 3.0% later in 2008 and then subside again. Until recently, the CPI remained low due to falling prices for imported products, restrained wage increases and appropriate actions by the BOE to restrain monetary policy and slow growth. However, several factors have contributed to the recent rise in inflation, including: Higher prices for food, fuel and other commodities Higher taxes on alcohol The weakening pound We believe most of these increases will likely be short term and thus unlikely to result in continued higher inflation. Q. What steps should long-term investors take? A. Don’t let the headlines affect your investment decisions. Remember to stay invested and remain calm. There are opportunities when the stock market declines. We think share prices for many quality companies have declined whilst their earnings are expected to continue to grow, suggesting they’re attractively valued. Also consider fixed-income investments to balance your portfolio, if needed. Some corporate bond prices have declined, which increases their yield. To help you decide whether to add or remove investments from your portfolio, contact your financial adviser and ask for a portfolio review. Kate Warne, Ph.D., CFA Market Strategist Source: Bloomberg Past Performance is not an indication of future results.*	Find an Edward Jones financial adviser. Find now »