Invest Where?
Isaac Hayes - 27 March 2009The crash has forced professional investors and academics to question the theoretical underpinnings of modern finance.
US stocks have fallen more than 60 per cent in real terms since the market peaked in 2000.
The loss of faith spreads beyond retail investors.
The most basic assumptions of the investment industry, and the products they offer to the public, must be reconsidered from scratch.
Anyone who started saving 40 years ago, when the postwar “baby boom” generation was just joining the workforce, has found that stocks have performed no better than 20-year government bonds since then.
The 2009 Credit Suisse Global Investment Returns Yearbook shows that since 1900 US stocks have averaged an annual real return of 6 per cent, compared with 2.1 per cent for bonds.
In the UK, equities have beaten gilts with a return of 5.1 per cent against 1.4 per cent.
Stocks are riskier than asset classes such as government bonds (which have a state guarantee), corporate bonds (which have a superior claim on a company’s resources) or cash. So the argument was that those who invested in them would in the long run be paid for taking this risk by receiving a higher return, of course this is now in question.
For decades until 1959, the yield paid out in dividends on stocks was higher than the yield paid out by bonds.
In 1951, US stocks yielded as much as 7 per cent, compared with only 2 per cent on bonds.
Come 1959, the yield on stocks dipped below the yield on bonds – and stayed there for almost half a century until the two crossed in November 2009.In the US, and later elsewhere, legislation gave individual investors more power over their retirement funds but also required them to take on the risks.
The search is on for a new theory to replace efficient markets, what they will come up with or “design” is anybodies guess.
1,471 hedge funds were liquidated last year, while only 659 new ones were launched, the lowest figure since 2000………….never did like hedge funds.
Traditional mutual funds, in which managers run a portfolio of about 100 stocks and attempt to beat a benchmark index, may be another casualty coming soon.
Index funds have caught on over the last two decades and, recently, their growth has been driven by exchange-traded funds – index funds that can be bought and sold directly on an exchange, but in reality are they any better than mutual funds?
More than 90m Americans own stocks, through mutual funds and 401(k) plans.Retail investors have close to $13,000bn sitting in money market funds and bank deposits. A year ago there was $7,000bn. That is billions that is just waiting to come back again.”…………..but where?
“Once the money gets under the mattress, which it has, it takes a long time to pry it out again,”
An asset manager recently said he does not see a shift away from using brokers or advisers: “Fear tends to lead people to want to talk to someone. They will go to the advisers and brokers: that is what has happened in past bear markets.
But remember it was the advisers and brokers which got all the investors into all these products, and I sure don’t need advice on how to lose money by going back to these thieves.
COMPLAINTS against financial advisers have gone through the roof as the world's economy continues its downward spiral.
The main areas of dispute were inappropriate advice, poor service, misrepresentation and delays in redemptions.
On average, there was a 45 per cent rise in disputes across all financial sectors.
