Weekly Financial News Update – Week of April 28, 2008
April 29th, 2008 by John Thomas
INTEREST RATE CUTS – IN PERSPECTIVE: When the last recession in the US ended on 11/30/01, the Fed had short-term interest rates at 2.0%. The Fed has interest rates at 2.25% today.
A POSITIVE MONTH?: Following the prior week’s rally that saw 4% (approximately) gains across the board, the market had another positive week as earnings season continued and oil prices set new highs. For the week, the Dow gained 0.33% and the S&P 500 0.54%. Though we still have three more trading days in April, the S&P 500 has gained +5.7% for the month which would be its first monthly gain since October.
POTENTIAL VS. REALITY - I am sure you have seen these statistics, but they are worth repeating. Mid-cap stocks have gained 15.3% per year over the last 20 calendar years as measured by the S&P 400 Midcap Index. Large cap stocks, as measured by the S&P 500 Index, have gained 11.8% per year. The average equity investor during this same time frame obtained average annual returns of 4.3% (source: DALBAR Quantitative Analysis of Investor Behavior 2007). In a recent presentation I reviewed, this disparity was explained by three factors:
- Loss Aversion – Investors tend to sell winners too soon (to get a win) and hold losers too long (avoid a loss).
- Hyperbolic Discounting – Investors tend to prefer small gains now to big gains over time.
- The Information Trap - In a comprehensive study, those who were classified as “news watchers” significantly underperformed those who were classified as the “no news” group. Financial news creates an emotional, short term, market focus whereas successful investing requires a rational, long term, goal focus.
INVESTOR BEHAVIOR IN 401(k) PLANS: 64% of 401(k) administrators have observed a trend on the part of 401(k) plan participants to either lower the amount they are electing to invest or change their asset allocation to more conservative investment options within the past 12 months (According to a survey of 401(k) plan administrators by the Nat’l Assoc. of Government DC Administrators).
UMBRELLA INSURANCE POLICIES – I often recommend an umbrella insurance policy as one of those “no brainers”. It is generally inexpensive, and provides a layer of protection from catastrophic liability losses. Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by your homeowners and automobile policies. It is generally sold in increments of one million dollars. The term “umbrella” is used because it covers liability claims from all policies underneath it, such as autos and homeowners policies. It is not hard to think of possible scenarios where a $200,000 or $500,000 policy limit would not be sufficient. Example: You crash into a Mercedes with a highly paid business executive at the wheel. He’s hurt so badly he cannot return to work. A jury awards him millions of dollars and you have to pay it. The court takes your savings, goes after your home and, for decades, requires you to give up a part of your salary. If you do not have such a policy, contact your agent and discuss it with him/her. If you don’t have an agent, call me and I will try to find an agent who can provide the insurance for you.
CHINA MOVING UP: In January 2006, China ranked as only the 6th largest economy in the world. In the subsequent 2 ¼ years, China has passed France, Britain, Germany and lastly Japan to reach 2nd place in the global rankings, trailing only the USA (according to The World Bank).
This information has been provided by my good friend and business associate Doug MacGray. Doug is a certified financial planner and if anybody is in need of his services, please contact me at 302-368-7132 and ask for John Thomas.
I am a Delaware native who has been actively involved in the Mortgage and Finanace industries for over 10 years. Call me at 302-703-0727
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[...] unknown wrote an interesting post today onHere’s a quick excerptIt is generally inexpensive, and provides a layer of protection from catastrophic liability losses. Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by your homeowners and automobile policies … [...]
[...] Tei wrote an interesting post today onHere’s a quick excerptExample: You crash into a Mercedes with a highly paid business executive at the wheel. He’s hurt so badly he cannot return to work. A jury awards him millions of dollars and you have to pay it. The court takes your savings, … [...]