Wednesday, October 29, 2008

What Floor Would You Like?

Have you ever got onto an elevator where they have someone who sits on a little stool and presses the buttons for you? While I question the wisdom of paying someone to simply push some buttons from a financial perspective, with the recent ups and downs in the markets of late I sometimes want to ask them to take me to another building.

Nouriel Roubini is an economist who actually predicted much of what we are going through back in 2006 (I wish I had seen this back then). In an interview on Bloomberg today, Roubini expects US markets to remain flat or drop further through the end of 2009. He believes there is still some downside risk in the markets as earnings for non-financial companies drop and as companies default. He made an interesting comment that "Americans can no longer use their home as an ATM". He expects the recession to end by the end of 2009 assuming the financial system issues get fixed.

Today's US Federal rate question is no longer an "if they drop rates" but by how much. Experts are split between a 50 and 75 basis point drop but it seems safe to expect a 50 basis point drop to leave room for future decreases. Along this point, expect a sideways shift in US markets today until the Fed rate decision release this afternoon.

On the home front, members of defined benefit pension plans may need to wonder how this affects them. A defined benefit plan (as opposed to the more common defined contribution plan), needs to have sufficient assets on hand to pay pensions current and future. If they do not have enough money (deficit), then they are required to increase funding. With recent market declines, a Globe and Mail article explains how forcing them to make up deficits could in theory bankrupt the companies. They are currently appealing to the government to relax rules due to extraordinary circumstances.

Lastly, Fidelity Investments provided an interesting history of the Toronto Stock Exchange. Going back to 1970 and up to September 2008, what would you think the value of a $100 investment would be? Would you believe $38,500? In that time, we have experienced six bull markets with an average return of 174% over 58 months and six bear markets (we're in number seven right now) that returned -31% over 10 months.

The 38 year history is of interest as it clearly defines a normal "working career" in length and explains the importance of not only early investing but consistent investing. Picture someone born in the year 1952, graduated from high school in 1969 and receiving a "gift" of $1,000 from a wealthy relative. Properly invested, with no further contributions, it would grow to $385,000 and produce approximately $2,000 in retirement income.
This is in spite of recent market declines.

One last thing - with Halloween coming in a couple days, I thought you might appreciate the humour in this...

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