By Jim Sandager, Senior Vice President – Financial Advisor,
Wealth Enhancement Group

Things change. And in the past year, it’s fair to say that things in the financial markets and economy have changed.

The economic story of 2008 will go down in the history books under one heading: awful. Collapsing housing prices. The near-collapse of the banking system. Massive government stimulus plans. Soaring unemployment. A deep and potentially lasting recession.

With all that, we’ve witnessed a dramatic drop in virtually every investment asset class — stocks, bonds, commodities, you name it. So far, things don’t look a whole lot better for 2009.

One of the great mantras of the financial service industry is: “Stay the course.” Variations include: Stick to your discipline. Trust in the long-term returns of the market. Generally speaking, this is good advice. Traditionally, rational markets tend to “revert to the mean,” generating returns that take into account long-term trends in inflation and risk relative to other asset classes.

But occasionally — 2008 and, so far, 2009 — markets have deviated significantly from these norms, which is why it’s sometimes a good idea to make a mid-course correction when the economy goes off the rails and rationality escapes the markets.

This is not a time to ignore the facts. For instance, stock market prices have taken a dive, but that doesn’t necessarily mean that stocks are a great bargain — at least relative to other types of investments. This may be a time to look elsewhere for opportunities. For instance:

Corporate bonds. 2008 was a year in which the corporate bond market was crushed. That included the bonds of high quality, stable companies — major companies in health care, basic consumer goods, internationally diversified manufacturing companies, such as 3M — whose prices have been driven down to levels well outside of historic norms. Properly evaluated, many of these bonds present attractive investment opportunities.

Municipal bonds. To be sure, governments everywhere are under extraordinary pressure. But these are extraordinary times in the municipal bond markets. With the extreme dislocation in the financial markets in the fall of 2008, the perceived stability of the so-called “mono-line” insurers — insurance companies that backed municipal bonds — were shaken to the core. As a result, many municipal bonds that were insured to AAA ratings by these companies are trading as though they have no insurance. This has resulted in yields that are well above their tax-equivalent counterparts. In other words, instead of trading at a discount to taxable bonds, they’re trading at a premium.

Cash. In most cases, financial advisors steer away from recommendations that an investor hold a significant portion of one’s portfolio in cash. Traditional thinking about cash is that it actually loses value because the interest paid on cash doesn’t make up for inflation. But with inflation now at virtually zero — indeed, economists are worried about deflation — cash may be a worthwhile alternative for the short term.

Sometimes, markets don’t make sense — and this is one of those times. Don’t be afraid to make a mid-course correction when those opportunities present themselves. But make sure you get some sound advice before you do. If you don’t already work with a Wealth Enhancement Group financial advisor, get a second opinion from our team by calling 800.492.1222 or click here.

Bond are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price. They are also subject to the credit risk of the issuer. Muni bond interest income may be subject t other alternative minimum tax. Federally tax-free but other state and local taxes may apply.