Taking advantage of market opportunities

- Alan Lavine and Gail Liberman

Reason: Even the Wall Street gurus have difficulty predicting the market. Meanwhile, a lot of buying and selling can trigger high capital gains taxes. In fact, we've actually seen investors owe capital gains taxes when an investment tanked!

But there are times, if you have a small amount of spare cash you're looking to invest over the long term, that keeping tabs on market trends can pay off. It has with us.

Don't get us wrong. We still believe that the easiest way for the average family to invest is to concentrate on diversifying over the long term. Own a lot of different assets. Your objective: Well-managed investments that are apt to do well when other investments you own do poorly.

With this approach, your overall holdings should do well on the upside, without getting you clobbered when the market goes against you. We follow this tactic religiously.

However, some three years ago, amid analyst reports that inflation was heating up and precious metals looked favorable, we took a chance with part of our annual retirement contribution. We earmarked this extra cash for a gold mutual fund, which is very risky and volatile. Since we made the investment, it's up about 52 percent, or some 17 percent annually. The keys to remember: This was only with a very small amount of our overall holdings, and it's an investment we intend to hold long term. Also, we kept it in a tax-deferred account, so as not to generate heavy capital gains taxes.

So what trends should you be monitoring now that might help you invest extra cash?

The economy and corporate earnings are slowing a bit. But the U.S. dollar is weak against foreign currencies. That bodes well for domestic large multinational corporations that pay high dividend yields. These companies are profiting from exports and overseas holdings in foreign currencies.

Luckily we haven't had too much inflation. It was running 2.6 percent as we wrote this. As a result, you can get good returns on corporate bonds and tax-free municipal bonds as well as bank CDs.

But with the price of gasoline expected to hit $4 per gallon, inflation could heat up and business conditions may slow. In that case, you'll want to keep cash available to invest in higher-yield bonds and CDs.

It also doesn't hurt to invest in inflation hedges, like gold bullion, precious metals mining stocks and real estate investment trusts.

Real estate historically has grown at about 3 percentage points more than the inflation rate. Meanwhile, gold does well when inflation heats up or there is a political crisis.

By the way, stocks historically have returned about 7 percentage points in annual return above the inflation rate, according to Ibbotson Associates, Chicago. Historically, they have done well in a presidential election year, which we'll be in next year.

Should you be concerned about the real estate market due to problems with subprime lenders? Economists say mortgage defaults will be a drag on the economy. But if you're well diversified in different types of stocks and bonds, this should not be a problem.

It can pay to stay informed.

Get mutual fund information from www.morningstar.com. Ask your broker for financial analyst reports for any stock you're considering. You also can get them for a fee at www.Yahoo.com. Click on "finance." Enter the stock you are interested in buying and you'll be provided with a list of brokerage firm reports and their prices.

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Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.