Equity markets have demonstrated mixed performances in reaction to economic news and fresh action policies by central bankers. Uncertainty of directional trends is forcing investors to digest the news and, depending on the perceived assessment of the situation, markets may swing in dips or rallies. Consequently, volatility in the current financial market crisis will linger on as long as available credit continues to shrink with an erosion in consumer and business spending.

Investors ask themselves if this is the right time to get back in the market, just because the US Federal Reserve Bank decided to cut interest rates by 0.5 percent.

True, in reaction, the Dow raced ahead last week for its second-best point gain as investors went on a shopping spree. But what kind of stocks are they buying? A rising tide, albeit sporadically, will not lift all stocks for there will always be weak companies out there that will either merge or go out of business.

It is here where investors need to be cautious and ask themselves if they should be buying right now.

Here is why: I believe the prevalent slow-growing world economies will keep earnings growth depressed from levels investors now regard as customary. That means price-to-earnings ratios will have to come down to something below the historical averages for stocks. Given that the economy is already struggling with inflationary pressures, the sentiment of a recession is getting stronger by the day evidenced by a recovery now seen as much slower than previously expected.

There are several observations I would like to make about the US and European equity markets based on the past few weeks of spectacular gyrations.

There are changes occurring in the approach and actual collaboration between the central banks that consistently attempt to realign their policies and position themselves for an upturn in this vicious cycle of economic uncertainty and financial volatility. I am tempted to believe that their concerted efforts will eventually pay-off. But for investors, however, it is no longer an issue of whether these policies will be implemented. Now it is a question of what the impact will be and how long it will take.

October was a brutal month to say the least, but how should the investors react in these unsettling conditions up the end of this year? Well, begin by building a new portfolio based on the following modest assets allocation criteria:

• The largest part of about 40 percent in cash by taking advantage of any rallies that may occur by the end of the year.

• Invest 20 percent of the portfolio in natural resources stocks. At current prices, I believe investors need to look for long-term rewards, as demand for these stocks will eventually drive prices to a new floor.

• Invest 20 percent in high-dividend stocks in sectors with huge potential for growth in 2009, i.e. “Get paid while you wait.”

• Invest the remaining 20 percent in growth stocks at a reasonable price with PE ratios of 25 or less to reduce risk on a sell-off, and a price-to-earning growth (PEG) ratio of 0.75 or lower.

I would conclude by saying that yes, the continuing financial crisis has left investors on edge, as it has negatively impacted economies around the world. No country or region has been completely isolated or immune from the financial storm. Regardless of what the pundits say about their concentrated mission to revive the economy and the short-term reactions in the equity markets, investors must always remember that these are only efforts and only time will prove their successes or failures.

(Habib F. Faris is the CEO and managing director of FinaVestment Ltd., London)