During the past year many have experienced great swings of mood as they watched their investments shrink and then grow again with economic news alternating between the desperate and the hopeful. Those with steely nerves just hoped for better days. Others bailed out of the troubled markets, especially in the beginning of the year when a financial meltdown seemed ominously near.

I have heard of incidents where local investors felt that in the years of abundance they were cheated into buying products that were not only risky, but outright unsuitable for their particular circumstances. Investments in commercial paper of Lehman Brothers, Royal Bank of Scotland, HBOS and participation in locally marketed property funds have given not just many sleepless nights to various small investors, but also decimated many portfolios.

The unusually low interest rates that prevailed throughout this year hit the pockets of many pensioners who depend on the interest income they get from bank deposits to shore them up because of their low pension income. In our aging population there are several thousand families that are in these circumstances.

The dismal return on bank deposits forced many to go for higher risks instruments, including junk bonds. We may be sowing the seed of the next financial crisis as more people are throwing caution to the wind and investing heavily in low quality bonds.

There were of course some winners in this turbulent year. The FTSE 100 index of Britain's biggest shares soared by more than 50 per cent since its low point reached on March 3 when the economic crisis was in its darkest hour. This has given a much needed boost to many pension funds and collective investment schemes that had seen the value of their assets butchered in the previous year. European and US bourses experienced similar gains and those who had nerves made of steel while everyone around them was panicking are today sitting on very decent returns.

So what is likely to happen in 2010? The simple answer is that no one really knows. Do not trust the charmers who tell you that they know it all and, believe me, there are many of these around. All one can hope for is to make some reasoned assessments and be guided accordingly. This is what I hope to do here.

Most bank accounts may be risk free, but they can also be return free. Our persistently high inflation can easily erode the value of your savings.

To start earning a real return locally, one has to find deposits paying a minimum of more than 2.35 per cent, assuming that one pays 15 per cent withholding tax and that inflation will stay at the two per cent level as predicted by the Minister of Finance.

Going for deposits in non-euro denominated currencies or for long-term deposits can only intensify your risks of getting a negative return. The strength of the euro could persist for a few more years and inflation is bound to shoot up in the medium term. This is a lethal combination that threatens the health of your savings.

But my biggest worry is the apparently insatiable appetite for local unrated bonds, some of which are definitely not investment grade quality. Above normal interest coupons mean above normal risk.

So far, we have been lucky with no major defaults in the local bonds market, but there are no guarantees that this will persist in the future. Until the local authorities make bond grading mandatory, I would stick to investing in investment rate bonds sold in international markets.

International equity markets are very erratic at present, but there seems to be a consensus among investment analysts that in the medium-term quality equities will continue to rise. But do not expect the 50 per cent return achieved by some brave and lucky souls this year. I am not so keen on the local stock market because it lacks depth and very often even liquidity even if there are some exceptions that can be exploited to vary one's portfolio.

Many fear that the biggest risk next year is a political one. With tensions building up in the Middle East as a result of the Iranian nuclear plans, any further escalation of belligerent rhetoric will surely unnerve the financial markets. One can only pray that this does not happen.

jcassarwhite@yahoo.com