Watch out for risk in stock market

- Alan Lavine and Gail Liberman

If so, experts say that this phenomenon, which took effect during Jimmy Carter's presidency, can be the worst of all worlds.

William Knapp, Ph.D., investment strategist for MainStay Investments, a division of New York Life, New York, recently said that investors should be mindful of the risks in the stock market. "Stagflation occurs, typically, when there is a supply shock, meaning that there's some restriction/constriction, limitation of supplies, particularly of important goods to an economy, and the price of that good rises," he said.

"It may be at a period when the economy is slowing, or it may exacerbate a slowdown in the economy because the price of that good goes up, and people divert income and expenditure to that good, away from others."

Experts are split on whether things will get that bad. Many say there's nothing to worry about.

But if you're a worry wart, and concerned about stagflation, it could pay to keep some money in cash. That's because interest rates will be rising along with inflation.

You also should own precious metals funds or gold. If we have high inflation, gold often increases in value and offsets declines in bond prices.

Don't expect the U.S. stock market to do well in such an economic climate. So it could be a good idea to hold blue-chip companies that do business worldwide.

It also could be a good idea to keep your powder dry in case you see buying opportunities. Look for mutual funds that invest in companies poised to grow strongly after the economy changes direction.

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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.