It really is the billion pound question, the one that's foxing every investor in the stockmarket - where are stocks likely to head in 2008?

Our yearly predictions have been spot on for the last 2 years but in this game past performance is nice but it's really all about future performance. You are as they say 'only as good as your next trade/investment'.

Firstly, I think that 2008 will be able to be summed up with one work UNCERTAINTY and this doesn't bode well for the bulls in the market because if there's one thing ALL markets dislike with a vengeance it's uncertainty.

Right now all this uncertainty lies not just with the sub-prime mess but its hidden knock on effects. Who knows for example what news is still lurking out there, and whether we lowly proletariat will even be party to the full extent of the mess?

Governments and Central Bankers since September 2001 can now always use the crass argument of 'national security concerns' for explaining away all sorts of closed doors deals/meetings/general murkiness.

But whatever the case, far too much is as stake so whatever information they try and hide from us is likely to cause more damage over the long run. We're dealing with politicians remember. Still, this doesn't necessarily help us offer a sound forecast for 2008.

The Best Strategy For 2008 Is Not To Forecast

Because nobody really knows what's happening or going to happen in 2008 it's most probably slightly foolish to even try and attempt to forecast. So whereas being 'proactive' rather than 'reactive' is normally a better strategy for life, in 2008 the opposite will be the more prudent approach for investors. Being 'reactive' is perhaps the secret to either doing well in 2008 or at least protecting what assets you own.

Reactive in this case means it's better to keep the majority of our powder dry till something really juicy pops up or takes our fancy. Cash is therefore going to be king for savvy investors in 2008, let everyone else sweat and worry about this quarter or next etc.

But sitting in cash doesn't mean we turn off, head to the sun for the next several months. No, we should still be taking an active interest in the markets and still be partly invested in stocks or sectors we like.

The Opportunity Cost Of Not Being Invested in Stocks

So what if I'm wrong and stocks move higher in 2008? Well, how high can they really be expected to reach in the current market climate? I'd suggest that 10% would be the maximum return for stocks but with cash right now we can easily get 6%+ risk free.

So the difference of 4% is most probably the downside risk of sitting on the sidelines BUT what happens if stocks move 5% to 20% lower which very possible? To me this is a strategic risk well worth taking.

Don't Forget The Psychological Benefit Of Holding Cash

A great advantage of holding a lot of an investment portfolio in cash right now is that if/when stock prices get beaten up you can still have a logical outlook as your mental state won't be swayed by continuing and mounting losses. Don't disregard this point as it's very important.

Buying Weakness Is Likely To Be A Good Strategy

Firstly, I'm defining weakness in 2008 as real weakness, not stock prices falling by say 5%. If shares are going to tempt me in 2008 then I really want to follow old man Rothschild's advice of only buying when there's blood in the streets.

Note however, that should blood in the streets become a reality, psychologically it will be very hard to buy stocks because it will seem like you're almost certainly going to lose money. But a favourite saying of this website when it comes to investing, and it is such a powerful money making rule, is 'always do the hard thing'.

So if you want to buy but can hardly bring yourself to pick up the phone or click the mouse then I'd put money on that being a pretty successful trade. As ever though, the trick will be (in a very volatile climate) to immediately take some profits if/when the market puts in some of those 200+ point days that are going to most probably be prevalent in 2008.

What Investment Tools To Use For 2008

One problem that many investors experience is where to actually invest, which stocks to buy etc. Unless you have a good hold on the overall market and have done some research into individual companies it's not hard to understand why this question can pose such a problem.

I'd suggest in order to overcome this you just focus on the FTSE 100 index or one of the other major indexes.

Using Spread Bets is one way to buy the FTSE 100 (and other indexes) but many don't like the speculative nature of these financial tools so why not consider ETFs or Exchange Traded Funds to give them their full name.

What Is An ETF

An ETF is a fund that acts like a traditional share so buying/selling £5,000 worth of the FTSE 100 ETF is no different to buying/selling £5,000 worth of Vodafone or Barclays.

• ETFs offer no leverage and usually match an underlying index
• The ticker code for the FTSE 100 is ISF, and
• MIDD for the FTSE 250

Assume for illustration purposes that the market slumps another 15% over the next few months and you see that as real value. If you were to buy the FTSE 100 ETF and the market then rallies 8% the ETF would also rally by 8% (not perfectly but near enough). This is because when you buy the ETF you're actually buying all the stocks in the underlying index.

If you were to do this same trade with Spread Bets you'd have to trade a set pound per point level and this for many people is slightly complicated. It's not hard to learn though but I do appreciate that a lot of people just don't want to get involved with Spread Bets citing them as far too speculative. ETFs then seem to be a really good tool to consider.

Stockmarket Summary For 2008

2008 for UK stocks will continue to be turbulent with strong arguments being made to support their views by both the bulls and bears.

The bears are focussing mainly on the sub-prime mess (and other related matters) while the bulls argue that the combination of inflation and the Fed's (and other Central Banks) rate cutting strategy will offer the ammo that stocks need to at least hold steady, if not rise in value. By the way more details by the way on inflation can be found on page 4 of this newsletter.