In personal investment, It is extremely important to diversify amongst many types of investments. One mistake that many investors make is to invest solely in stocks (via their 401k etc…) and never move their assets into more stable and less-risky investments like real estate or low-risk bonds.
Take a look at the performance of stocks since 1928:
As you can see, there is an obvious pattern of long-term growth. However, there are periods of significant loss — such as what we are currently experiencing now.
Since 2007, stocks have seen an incredible drop in value. Bonds however, have fared a bit better (as measured by the Vanguard Total Bond Index – BND)
There appears to be an inverse relationship between the performance of stocks and bonds since 2007. This relationship is even further illustrated by this scatterplot:
One passive investment strategy is to invest in both stocks and bonds — using the bonds to hedge the perforance of stocks. Certainly when you get closer to retirement it is important to move more assets into more stable and less-risky investments.
Interest rates may have to be slashed to the lowest level in more than 300 years, experts have warned.
By Edmund Conway, Economics Editor
The Telegraph, 17 Oct 2008
The Bank of England faces cutting borrowing costs to beneath two per cent – or even as low as one per cent – within months as it battles to protect Britain from the financial crisis and the worst recession in decades, economists said.
Such a drastic move would bring rates, currently 4.5 per cent, to their lowest level since the Bank was founded in 1694.
The rate cut would be good news for borrowers, who have faced sharp increases in their mortgage rates as embattled banks have raised the cost of borrowing in recent months.
However, it would be a blow for Britain’s savers, who have seen their almost 1 trillion worth of deposits eroded by 16-year high inflation.
The forecast came on a turbulent day for world markets, as leading shares in London dropped to their lowest level since the time of the Iraq War in early 2003, amid growing fears that the financial crisis has not been overcome.
The FTSE 100 benchmark index dropped by 5.4 per cent to 3861.39 points.
There is growing consternation that, in the wake of the financial turmoil, the Western world is slipping into a serious economic slump. In the US the Dow Jones Industrial Average veered sharply after it emerged that American manufacturing output plunged at the fastest rate in 34 years.
Shares in Britain’s biggest insurers including Prudential, Legal & General and Aviva fell by as much as a fifth as concerns grew that they could prove the next victims of the crisis.
Meanwhile, worries mounted that the 2 trillion international bail-out of the banking system had been ineffective, as banks are still unwilling to lend money to each other.
Despite Gordon Brown’s 500 billion bail-out of high street banks the cost of wholesale borrowing has failed to drop back to more reasonable levels.
Such is the scale of the crisis that economists said that the Bank may now be forced into dramatic cuts in its key interest rate in order to prevent the probable recession from escalating into a longer-lasting depression.
Roger Bootle, managing director of Capital Economics and a former Treasury adviser, said the Bank’s Monetary Policy Committee may have to cut rates to below two per cent.
“It is critical to get rates lower – if the medicine is not working you have to use a stronger dose,” he said. “[The Bank] needs to get rates down far and fast.
“They need to be pretty bold. The lowest rates have ever gone is two per cent. They could easily go lower than that now – why not? After all the Federal Reserve [in the US] dropped rates to one per cent.”
He said that even such a dramatic move, alongside the recent part-nationalisation of UK banks, would not guarantee solving the financial crisis, although it would increase the chances of recovery afterwards.
The Government was warned this week that unemployment could rise to three million in the coming years after the jobless total jumped by the fastest rate since the 1991 recession.
Homeowners were also warned that, even if they are among the third of households with a tracker mortgage which follows the Bank’s rate, they may not benefit if rates fall to such a low level.
Most mortgage lenders, including Halifax and Nationwide, tend to prevent their tracker mortgage rates from being cut further once the Bank’s base rate drops below 3 per cent or 2.75 per cent.
The Bank surprised the City with an emergency half percentage point rate cut last Wednesday, and is widely expected to reduce rates again at its next meeting early next month.
Alan Clarke of BNP Paribas said it may have to cut rates by even more than half a percentage point. He added that although he expects rates to be cut to 2.5 per cent by May, there is a chance that they could have to drop to two per cent or below in the same timeframe.
“One per cent or lower is not impossible,” he added. “The important trigger is the labour market: unemployment over say eight per cent would be a disaster.”
Tim Congdon, the prominent economist who was one of the few to warn last year that inflation could rise towards five per cent, agreed that borrowing costs could have to drop to around two per cent.
The threat posed by high inflation has receded in recent months, as food and oil prices have dropped sharply.
At below $70 a barrel, the crude price is now less than half the level it hit at its peak earlier this year, while wheat prices are a third of their peak price. Many economists now expect inflation to drop to beneath the Bank’s two per cent target by next year.
Five years ago, as share prices hit the trough of the dot-com slump, the Bank cut borrowing costs to 3.5 per cent. The lowest they hit before then was for the 25 years following the Great Depression, when they were kept fixed at two per cent.