I don’t know if you looked at the ticker on MSNBC, but the DOW slipped back in to the 11,000’s for the first time since early 2006. In times like these, it is important to have a game plan. I’ve explained earlier that this is a time to rejoice rather than panic. Think of the situation as a blowout sale- all the stocks you’ve ever wanted are available at closeout prices!

In order to take advantage of recessionary times such as these, it is important to maintain a cash reserve in your portfolio. A conservative portfolio typically consists of 60% stocks, 30%, and 10% cash holding (I prefer a more risky approach with 85% stock because all research provides that stocks have a much higher average return and provide dividends). The 10% cash holding will allow an individual to take advantage of great prices. And right now, it’s like a firework stand on the 5th of July.

But how do you know what to buy? This part, unfortunately, involves research. One way to think about the opportunities that exist is to think about what market segments got hit the hardest. Sometimes looking through the trash you can find a treasure. Let’s examine the housing market for a second.

Many of the problems with the economy stem from the housing market and therefore opportunities may be around the corner. Using the past as a guideline for future strategy, a similar crisis occurred during the mid-1970s when America faced a similar housing crisis when a period of easy credit and loose underwriting flooded the market with new construction. Congress reacted then with $6,000 credit for the purchase of a new home for principle residence. In the aftermath of the legislation, home values stabilized, housing inventory dropped, and the market stabilized.

Now I would never recommend driving while looking through the rear-view mirror, it is important to examine precedence in similar situations. Legislation(S.2566), at the end of January, was introduced that would offer home buyers a $15,000 credit for purchase of a new home, foreclosed home, or a home where foreclosure is pending. It is difficult to see this bill being rejected as the Democrats would support it because it is more beneficial to lower-income residents and Republicans are for the most part against higher taxes. Besides, in an election year, neither party would want to be responsible for turning their backs on the struggling Americans, right? Think of the negative advertisements that would produce!

“John McCain doesn’t want you to live in a house. John McCain hates you.”

I must warn, this is a future thinking statement based purely on speculation, but there may be tremendous opportunities waiting in the segments that have been hit the hardest. The largest mortgage provider in the country, Countrywide Financial (CFC), has declined 88% in the past 52 weeks. The market tends to overreact in both directions and legislation such as S.2566 could catapult a company like CFC, or any other mortgage provider, straight out of the garbage bin.

Footnote: “Isakson Introduces Legislation Offering Tax Credit to Homebuyers.” The Weekly Online.

Source by Jared Fischer