After a tumultuous week that saw two sharp dips in the Shanghai Index, Tuesday saw the market end in positive territory, after being down 7% earlier in the trading day.

What gives?

Investors in China and other emerging markets should be aware that these are high-risk investments, and therefore will experience higher volatility than investments in the more mature markets of Western Europe, North America, and Japan.
The recent dips experienced in Shanghai are the direct result of a change in China’s taxes on stock investments. The change was implemented to detract speculators from high-risk short-term investments. It is the first step in the maturity of China’s Finance Ministry, which is implementing long-term solutions to the rapid business development issues the country is facing.

Though it is likely that highly volatile days like the ones we have seen will happen again in China, the long-term trend should remain positive, as its development is just underway.

Jim Cramer was on the Chris Matthews Show this week and mentioned that he expects the Dow to rise an additional 10% within the next 6 months.

That would put the Dow at almost 14,500 by year’s end, which seems like a pipe dream to those of us who’ve been watching the US economy flounder in comparison to overseas investments.
Or is it?

Cramer’s assertation that it is the BRICs that are leading the world is right on target, and it’s important to point out that the Dow 30 is heavily weighted with companies that do a lot of business overseas. By some estimates, 40% of revenues from companies in the Dow come from Europe, Asia and Emerging Markets.

For that reason alone, it’s reasonable to assume that the Dow will break away from the S&P 500 in performance this year, and in the years to come. Big hitters like Alcoa and Boeing can expect big numbers from developing economies that will need their products.

The Shanghai Composite Index was down 2.91%. Tuesday’s 8.8% drop was followed by a slight recovery, but precipitated strong declines worldwide, and it appears that China is leading the way, bullish or bearish.

While the Chinese market has a long way to go before one can call it truly “overvalued,” skepticism and the specter of stricter taxes and regulations are warning signs of a rocky road ahead.

For now, it seems that world markets are likely to follow the lead of the Chinese stocks. Japan’s Nikkei ended Thursday down for its third straight day (-1.2%), and Hong Kong’s Hang Seng index was down 0.5%.

U.S. stock markets notched their poorest performance since September 2001, right after the terrorist attacks on the World Trade Center and Pentagon.
The Dow fell 416.02, or 3.29%; the Nasdaq dropped 3.9%; the S&P 500 index fell by 3.5%. Earlier in the day the Dow had dropped over 500 points. All thirty stocks in the average were down for the day.
This fall comes on the heels of the worst day in ten years for China’s Shanghai Composite Index, which fell 8.8% yesterday.

The U.S. Equity selloff was greater than any other market, except for China, though the effect was global.
Weakness in Asia has spread global, as Japan’s Nikkei and Topix notched losses of 0.5% and 0.3%, respectively.

The United Kingdom’s FTSE and the German DAX were both down 2.3%, and the French CAC-40 dropped 2.6%.

It is possible that the bloodletting is not over, with U.S. equities, typically less volatile than emerging and developed global markets, being hit so hard. Such a selloff on Wall Street is likely to shake European and Asian markets during the coming trading sessions.

Bonds posted strong gains throughout the day, and, along with dividend-paying stocks that have been hit significantly, are expected to provide stability in the coming trading days.

Stocks are sharply down Tuesday, with the Dow down 1.6% and the Nasdaq down 2.5%.

While this is being called a correction, it certainly has many investors concerned, but the main concern is the damage done to emerging markets and, in particular China, which appears to have quite a way to go before hitting bottom.

Risk-averse investors should take note, however, that volatile times are among us, and there are safer bets than the current buying opportunities presented by the recent declines.

Buy-write describes a hedging strategy in which a security is simultaneously bought and call options are written for the same security. Options are considered to be extremely risky, and used with caution and professional advice.
A recent study at the Center for International Securities and Derivatives Markets at the University of Massachusetts’ Isenberg School of Management determined that a buy-write strategy consistently improved risk-adjusted performance over a ten-year period (Jan. 18, 1996 to Nov. 16, 2006).

The study compared the Russell 2000 Index with one-month on-the-money buy-write strategy as well as a 2% out-of-the-money strategy and a 2% in-the money strategy.

The index overall performed better than the buy-write strategies over the ten-year period, returning 10.67% annualized, while the buy-write strategies performed similarly on a risk-adjusted basis, particularly the on-the money strategy, ranging from 9.21% (ATM) to 10.60% annualized (OTM).

During the unfavorable market conditions (January 1996-Febryary 2003), however, the buy-write strategies handily outperformed the index.

Significantly, the buy-write strategy lowered volatility enough to show that the strategy can outperform the index by neutralizing the effects of market fluctuations, while not sacrificing the gains of an up market.

The study does, however note that returns for the buy-write strategy are less normalized than those of the index, and, therefore, risk measures other than volatility may be more appropriate. Further, the study suggests that a more active approach, based on valuations and call selection, may significantly boost returns, both absolute and risk-adjusted.

The complete study can be found at the center for Institutional investors at the Options Industry Council.

The Census Bureau released a report today that 2.1 million homes were vacant at the end of 2006, representing 2.7% of all owned units. That is the highest vacancy rate in over 50 years.

2006 will not be remembered the year of the bust, as the median home price came in well above $150,000 for the first time ever.

Rental prices also had a record year, topping $700 per month on average across the United States for the first time ever in the fourth quarter.

The report is further evidence that the housing bubble has not yet reached its trough, as supply is clearly outstripping demand. It is highly likely that this kind of vacancy rate will lead to fewer housing starts and lower bottom lines for homebuilders nationwide, as a buyers market opens regionally.

Details of the report can be found at census.gov.

While there really is no comparison to a professional investment adviser to help make investing decisions, for most people it’s just too expensive to get that advice. Further, most advice centers on investing with $1,000 or $10,000, and most just don’t have that to risk in the stock market.

We’re going to tell you how to do it with as little as $100.

Ultimately, whether you have $100 or $1,000,000, the story is the same: create a diverse portfolio of stocks and bonds that will withstand stock market dips while increasing in value over the long term.

Here are three simple steps to achieve this with $100:

1. Open a brokerage account with a discount broker that has no investment minimums and low transaction fees. We recommend Zecco, which offers 40 free trades per month and no hidden fees or account minimums.
2. Fund the account. This is where you send money to the account by check, wire transfer, or automated clearing house (ACH). ACH is preferred because it is faster than a check and wire transfers are relatively expensive.
3. Make your first investment.

You’re going to want, as mentioned earlier, a widely diverse portfolio that covers all sectors and countries. You can’t exactly do that with $100 if you’re going to invest in stocks. Also, corporate bonds and mutual funds are out, since they require more capital than $100.

ETFs (Exchange Traded Funds), however, are like mutual funds that trade on the stock market, and you can purchase partial shares. Many ETFs track widely diverse indices, such as the S&P 500 or the MSCI-EAFE global index, or the Lehman Brother Aggregate Bond Index.

If you were to invest $100 in a different ETF every month for three months, you could have a well-diversified portfolio of stocks and bonds that would withstand most market volatility while steadily growing as the market does over time.

Of course, you would want to add to your investment on a regular basis, and I would invest no less than $100 at a time to keep transaction fees from limiting your growth. And when your account reaches $10,000 you’ll want to seek professional advice or at least move your funds over to traditional mutual funds, which typically have lower cost structures and are easier to manage.

But this is a pretty simple, inexpensive way to start investing.

The National Association of Realtors announced a sharp drop in existing home sales in December 2006. According to the report, existing home sales fell by over eight percent in 2006. Also, a number of homebuilders released sobering forecasts for 2007.

Heavy selling in the bond market led to the highest yields in five months. The 10-year Treasury finished the day at 98 3/32, with its yield at a lofty 4.867%.

Turbulence in the housing and bond markets seeped into the broader market, sending the Dow down 1%, while the S&P 500 and the Nasdaq slipped by 1.1% and 1.3%, respectively.

The day’s winners were eBay and Nokia, up 8.2% and 4.5%, respectively. eBay posted sales growth of 29% while Nokia announced a 19% increase in profits.

This is a question I recently got, and the answer is simple: yes, but the maximum annual IRA investment is a total (cumulative) amount, not per account. In other words, if you have four different IRAs with four different companies and your maximum IRA contribution is $4,000 for the year, you can only contribute $4,000 total, to all four accounts.
A more important question is: should you have different accounts?

Most investment advisors will tell you no, partly because it will be too difficult to manage, and partly because they want all of your money to be going to them and their funds.

While there is more to pay attention to when holding multiple accounts, there is usually little active management that goes on in an IRA. You open the account, buy the securities (usually mutual funds or money markets), and hold.

There isn’t really a lot of management with an IRA. Every year you’ll want to make sure your asset allocation is appropriate. You’ll add funds as you can.

The benefit of holding multiple accounts is no different than the benefit of holding different investments: diversification. Maybe one company is offering low fees but has a limited selection of mutual funds available. Another company may have slightly higher transaction costs but a wider variety of funds.

Sometimes, opening a new account is the only way to invest in a mutual fund you really would like to hold in an IRA. If your current broker (or 401(k), or SEP IRA, etc.) does not offer a particular fund, for example, you may have to open an account with another broker just to hold a fund in a tax-deferred account.

The downside is cost… maybe

Each company you have an account with will likely charge you a fee for management, but some discount brokers only charge for purchases and redemptions. As a result, you should have as few accounts as possible.

So, take a look at account fees and determine whether it’s worth it to pay each company the fees it is deducting from your bottom line.

The important thing is that you are satisfied with your investments and the way the management company reports your holdings, returns and losses.