Friday, July 17, 2009

Did You Look At Your Investment Statements?

Back in January, the general consensus seemed to be resignation and panic. Many people told me they simply refused to open their investment statement. Others mentioned that they literally shredded them or ignored them. The brave souls who actually opened them spent the next month trying to comprehend what went wrong.

Well six months have passed, markets have begun to return to some form of normalcy and now comes your statement. Should you open it? Is there another whammy inside? What would a smart person do?

Simple. Remember that investing is a marathon and not the 100 metres. Your December 2008 statement represented a stumble - a fatal issue in the 100 metres but hardly a concern in a race of 26 miles (42 kilometres). Grab a beverage, sit down in a comfy chair, clear your mind of all negative thoughts and then open the statement. Did you survive?

Of course you survived and the reason I know this is very simple. With the exception of certain specific market segments and foreign investments, most markets returned a somewhat modest 5-10% return over the past six months. Some of the biggest naysayers before this whole mess are now starting to backtrack and are predicting an end to the recession is near. Within the actual stock markets, some did better than others - include the Toronto Stock Exchange (15%) and the Nasdaq (16%) in that group. Want a more telling indication that we are slowly leaving the drama of the past 10 months behinds us?

The Conference Board in the US analyzes tons of economic data to come up with (among other things) three monthly indexes that claim to provide insight for business leaders to use in planning what to do next.
The leading economic index (LEI) is made up of items generally judged to show changes ahead of the general economy. To gauge the future direction of the economy, you’d look at the LEI.
The coincident economic index (CEI) is made up of items generally judged to track (coincide) with current economic conditions. To take the current temperature of the economy, you’d look at the CEI.
The lagging economic index (LAG) is made up of items generally judged to lag behind the general economy. To confirm where the economy came from, you’d look at the LAG.
Here is a historical chart of the Conference Board’s LEI and CEI

Do you notice that the blue line is continuing a downward trend but seems to be "flattening"? This line represents current economic conditions. Look at the red line - this is the leading indicator for the future of the economy. Notice the dramatic uptick over the past 3 months? On March 9th, stock markets bottomed out and since then have been rising and falling but on an upward trend. My best explanation is this - take a Yo-Yo and get on an escalator going up. Start playing with the Yo-Yo. Even though the yo-yo is going up and down, the general direction for the yo-yo relative to your starting position is upward.

Does this mean everything is fine and we can go back to spending like drunker sailors? Of course not. The coming months will show that there are still areas of the economy in bad shape. One of my biggest hopes is that this economic downturn will make more people realize the importance of proper planning for the future. Having an emergency fund instead of using a credit card to solve those unexpected problems. Paying for things with cold hard cash instead of putting it on time. The days of running a deficit will hopefully be contained to governments who have the option to do so.

As always, Stay Well and Pay It Forward.

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