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Optimism appears to be returning to Wall Street following the release of some log-awaited key United States data.
The data – which involved United States banks as well as the country’s unemployment figures – sparked a rally in US stocks.
Investors were pleased that the much touted bank stress tests did not throw up any major surprises. The USD $75 billion required to shore up 10 of the 19 banks that were put to the test appeared to be a figure that the market was expecting. Banking stocks rose significantly as a result.
In addition to the news on banks there was also US jobs data. And despite the fact that the US economy lost 539, 000 jobs in April this was lower than the 600,000 job losses that the market expected.
The markets appeared to like what they heard and the Dow Jones Industrial Average closed at a level of 8574.65 on Friday. This was an increase of 4.4% on the week.
Perhaps it was this newfound positive sentiment – and possible anticipation of things to come – that sparked some newfound interest from one of my own clients in his personal portfolio.
“Have my investments lost money?” the client in question asked.
“Only if you need the money now,” I replied.
As it happens this particular client’s investment portfolio was down by about 30% since he started investing just over 2 years ago. His pension scheme – which he was paying in to monthly – was also down by a similar amount.
“Remember our goals,” I continued. “You are in it for the long term and your investments are for your retirement.”
The client in question is 45 and he had planned to access his funds and investments at age 60 or 65. He had invested USD $141,000 as a lump sum in a variety of investment funds including an emerging market fund. The worst of his individual lump sum investments was down by 55% while the best performer had declined by 9%.
In addition to his lump sum investments the client is also making regular contributions to a pension scheme. This was also down by about 33% . The scheme is due to mature in 2015.
“What do you think my investments will be worth in 5 or 6 years time?” the client asked.
“In your time horizon I would expect growth to be target or even better due to the severity of the correction and don’t forget unit cost averaging.” I replied. “A lot depends on this much talked about recovery.”
Ahead of an annual meeting of his Berkshire Hathaway investment company recently one of the world’s most respected investors Warren Buffet was reported to have told CNBC that, when it came to the economy, ‘the economic Pearl Harbor’ he had described earlier in the year has passed, but the ‘war isn’t over.’
And it certainly isn’t. One only has to take a look at the United Kingdom’s latest budget which was announced last month to realize the seriousness of the UK economy and the global financial crisis in general.
The UK’s Chancellor of the Exchequer (Finance Minister) Alistair Darling – in unveiling the budget – announced that the UK will borrow a record GBP 175 billion (USD $260 billion) over the next 2 years. Total government debt will double to 79% of GDP by 2013.
Some of the key points of the UK budget was the introduction of a 50% tax rate for those earning more than GBP 150,000 (USD $223,205) per year as well as a freeze on public spending.
The Chancellor also confirmed earlier predictions that the UK economy would shrink by 3.5% this year and would achieve growth of 1.25% next year. Growth would rise to 3.5% in 2011. The government’s economic growth forecasts were greeted with skepticism.
So, what advice did I give my inquisitive client? Well, once again, amidst all this economic uncertainty, I told him to keep up with his monthly contributions which would allow him to buy units at ‘cheap’ rates that he would benefit from when he came to ‘cash-in’ the fund in 2015 or later.
By investing a set amount each month he would be able to take advantage of market fluctuations.
I also told him to avoid cashing in any of his other investments right now to give them a chance to recover – as I am certain they will. It is just a matter of time!
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