As the world comes to grips with the financial crisis and most pension plans and mutual funds report their yearend performance, more bad news is expected as the reality of the situation appears in print to hundreds of millions of individual inactive investors. It is the awakening of these investors that will drive the stock and bond markets over the next quarter.Many persons have money being invested directly out of their pay packet into pension plans, annuities or mutual (stock-based, bond-based, real estate-based and balance) funds, most of these investment instruments are legally required to publish or file quarterly performance reports with the security and exchange commission, but as a general rule, they only print individual statements once a year to be used for personal income tax filings. The 2008 financial crisis has been widely and intensely covered and discussed across every media house and academic forum in the world and many people have already been affected by it, through defaulting or missing mortgage payments, being denied new loans or directly or indirectly through job losses, but when investment statements are received by the more passive investors, a further reaction is expected.
Pension managers have already seen companies renegotiating with their workers’ unions to reduce overall cost, including pension contributions. Investment advisers are advocating the buying opportunities that traditionally exist when stock prices fall, but warn investors to seek companies whose income-base is international to lessen the effects of any recession and to keep their eyes on the fundamentals such as the price to earnings ratios. As people compare the printed values of their investment instruments year to year calculating they personal percentage changes, while their cost of living continues to rise and uncertainty describes the future, it is easy to predict that less funds will flow in and more will flow out of mutual funds.
Traditionally as stock markets fall funds migrate to bonds, but with interest rates low as monetary policy is being used to stimulate economic activity, many fund managers are heavily positioned in cash and waiting on the next bubble. The employed passive investor will, like the professional fund manager, predictably keep cash, by paying off credit cards and small loans balances to reduce or eliminate interest charges, cut non-essential expenses and save on basics, while waiting on cash deposits, bond rates and money market funds to rebound.
For many people the important question is when will returns on investment better inflation? The answer depends on the individual’s tolerance for risk; a young person having more time before retiring can take more risk - buy cheap stocks and hold, an older person closer to retirement and not prepared to take any risk then keep cash and wait on rates to improve. For those who have long-term obligations; mortgage to pay, large multi-year loans to repay, saving for children’s education and are midway into their working lives, Do Not Open any investment statements this year.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
