Their material interests are best served by letting financial corporations do as they please in a softly regulated environment. We have, in the main, appointed foxes to guard our financial chickens. The saving rate is rising rapidly as households repay debt and attempt to rebuild wealth to create a cushion against job and income loss. Stock and residential housing values in the US have dropped by more than a combined $15 trillion, a 24% decline from the 2007 peak of $64 trillion.
—that is, the overall mix of stocks, bonds and cash in your portfolio—that you’re comfortable with, even in a down market. Make sure it’s still in sync with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more time you’ll have to potentially benefit from up or down markets. If you’re likely to move within five to seven years, you could consider a shorter-maturity loan or an adjustable-rate mortgage, depending on current mortgage rates and options. Don’t consider this if you think you may live in your home for longer, or may not be able to manage mortgage payment resets if interest rates or your plans change. We also don’t suggest that you borrow money under the assumption that your home will automatically increase in value.
Only massive government bailouts kept these ‘zombie banks’ alive. 8 Had the government not put $180 billion into AIG, many large financial institutions around the world would have failed. Ultimately, CDSs made the system more fragile because they facilitated excessive risk-taking.
The scope and severity of the current crisis is a clear signal that the growth trajectory of financial markets in recent decades is unsustainable and must be reversed. It is not possible for the value of financial assets to remain so large relative to the real economy because the real economy cannot consistently generate the cash flows required to sustain such inflated financial claims. It is not economically efficient to have such large proportions of income and human and material resources captured by the financial sector. By the end of 2008 many large banks had seen their equity position evaporate to the brink of insolvency and beyond.
Ironically, while the ability to hedge via derivatives can make an individual investor safer, it can simultaneously make the system riskier. For example, hedging often involves dynamic derivative trading strategies that rely on liquid continuous markets with low to moderate transactions costs.
Historically, long-term home appreciation has significantly lagged the total return of a varied stock portfolio. And, for any type of debt, have a disciplined payback schedule. Try to pay off credit card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt adds up quickly if you carry a balance. Consider consolidating your debt in a low-rate home equity loan or line of credit, set a realistic budget and have a plan and a plan to pay it back. Don’t confuse what you can borrow with what you should borrow.
Keep the monthly costs of owning a home below 28% of your pre-tax income and your total monthly debt payments below 36% of your pre-tax income. Half of the spectacular rise in investment bank’s return on equity in the four years leading up to the crisis was generated by higher leverage rather than smart investing, efficient innovation or even boom-induced capital gains on trading assets. Das for concrete examples of the risk- and complexity-augmenting properties of structured financial products.
Keep in mind that a beneficiary designation or asset titling trumps what’s written in a will, so make sure all documents are consistent and reflect your desires. When writing a will, we recommend working with an experienced lawyer or estate planning attorney. Evaluate your portfolio’s performance at least twice a year using the right benchmarks. Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child’s education or retirement, begin to reduce investment risk, if appropriate, so you don’t have to sell more volatile investments, such as stocks, when you need them.