Unless you’ve been marooned on a desert island, you’ve probably noticed that the stock and bond markets have been somewhat volatile during the last several weeks, largely the result of concerns about “sub-prime” mortgages. We’ve all read or heard about them lately in the news, but what exactly are “sub-prime mortgages” and how did they lead us to where we are today?

Here’s the short (sort of) answer. Worldwide credit conditions have been relatively easy for the last five or six years, encouraging the creation of creative mortgage loans with unusually generous terms. Many of these loans were originated by startup mortgage companies owned by real estate agents and other industry insiders with potential conflicts of interest, and offered to home buyers with low incomes or poor credit histories. These loans were bundled together and sold to investment banks, leaving little incentive for the real-estate-agent-cum-mortgage-broker to enforce the lending standards typically associated with traditional banks. The investment banks then repackaged these loans into derivative securities with varying degrees of risk and resold them to investors whose appetites for higher yielding investments have grown substantially in recent years. As the homeowners began to default on their loans — their monthly payments often rising dramatically after an introductory period — the securities backed by these loans lost significant value, sparking broader concerns about the easy credit and ample liquidity that have fueled the waves of speculative investing we have witnessed in the last decade.

Somewhat troubling news indeed but, at least according to Sacramento investment firm Dalatri, Jenkins & Manginelli, the recent volatility is ultimately healthy for the markets, allowing them to work off pent-up excesses. They believe the equity markets remain in a long-term uptrend, supported by the expanding global economy and strong corporate earnings. They make a strong case for high quality investments with global exposure that have been under represented over the past six years.

What does all this mean for you and me? Well, I’m no investment guru but, if they’re right, we should be selectively adding high quality investments to our portfolios. Be aware of risks, of course, and remember the old adage: If it sounds too good to be true, it probably is. While high-grade, high quality investments may not always appear to offer the best returns, in the long run they usually do.