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Whilst many investors have experienced some excellent returns over the last few years, certainly 2007 was fraught with volatility and some interesting times including the subprime debacle. In fact for most, the word subprime has become a buzzword but before last year was unknown. So what is subprime? Subprime is the practice of lending money to borrowers who do not qualify under normal terms for best rates. In other words, these are loans made to people who do not meet the standard requirements on earnings to borrowings ratio’s, credit history or a host of other reasons. Banks will lend to these clients, taking a higher risk and charging a higher rate of interest. Unfortunately over the last 4 years or so, lending in this market got out of control and anyone could borrow money to buy a house (often a 2nd, 3rd or 4th property for investment) based on ‘discounted’ rates. Once these rates were normalized, which began happening last year, the borrowers were unable to meet the obligation and thus defaults and repossessions began. This has had a major impact on a lot of the US housing market with values falling, repossessions and defaults climbing and a general unraveling of a lot of ‘bad loans’.
The question that remains is as to how much of this subprime market has already come to the surface and been declared and how much is still to come? Additionally how much more is still hidden in credit card debt? Beyond this we can also see many other areas that could potentially cause a great deal of uncertainty in the financial markets.
The ultimate question for any investor or potential investor is “what should I do?” If one stays out of the markets then there is a definite risk of missing out on great opportunities, especially with the continually falling interest rates, the FED being forced to cut rates significantly to stave off an impending recession. If one is in the markets then potentially you are exposed to sudden falls in value as was experienced in the 3rd week of January. For me, the answer is that whenever there is a down market, somewhere there is an up market and thus one should be invested but of course, choosing sectors wisely.
Today there are many opportunities to invest in a multitude of sectors including the likes of Agriculture, New Energies, Water and Natural Resources to name a few. The days of simply buying a Vanguard 500 fund (or similar) and just holding it for 10 years, I believe are gone.
We have major globalization as well as the development of some massive markets such as China and India, two super powers of the future. If one is looking to invest and by this I mean be in the markets for the medium to long term rather than taking a short term ‘gamble’ then I firmly believe there is excellent opportunity out there, not without volatility, but certainly with great upside potential.
It is advisable to work with a professional financial advisor who will help you to clearly define your goals and objectives and time horizons and then recommend suitable investments within these criteria.
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