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How Serious Is Sub-Prime Home Loan Issue?

As a long term investor, you do not need to flee the market unless you are near to the retirement age (meaning, you are no longer "long term" in your investment). For many long term investor, they would say that the fundamental is unchanged. So, their stock valuation should not change.

However, we must not be complacent about it. Fundamental do change when the market condition changes. That is the fact. How your stock will be affected depends on a few factors. The number one factor is whether the stock that you purchase is directly involved in the sub-prime loans. If they are, then the fundamentals of that company is changed immediately. The profit will be affected directly. So, if you are holding banking stocks, you may suffer loses. That amount will depend on what level of involvement your banking stock participates.

However, if you are holding stocks of MacDonalds or Coca-cola, the impact to your stock will be minimal. You may see immediate price down but the prices will come back very soon. As a long term investor, you would probably divest your investment into different industrial sectors. It would be highly probably that 10-15% of your portfolio is affected immediately.

The sub-prime issue does not impact the US financial sector alone. Most of the risks has been packaged as Collateral Debt Obligations (CDO) and sold to foreign financial institutions in Europe and other parts of the world. The risks has been distributed to other countries. It will impact the whole world's financial sector. The overall effect still not quite know and this is causing fear among the investors.

The fact that ECB and FED are injecting funds into the banking sector elevates the fears of the investors...


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