This is an era when investors should be wary. Equity markets are volatile and in turmoil, and the bond markets provide only a very meager return.
The equity market has become a blatant gambling casino. One study revealed that on average, among professional investors, the holding time of an “ investment” position is 22 seconds.
A search of transparent information about the prospects of Facebook is merely the latest evidence of the lack of basic integrity in this sector or indeed of any consideration of the public’s interests. It appears the investment community could be afflicted by widespread corruption.
In the bond market, interest rates are so low that a saver placing funds in government bonds realizes a return of approximately one per cent, and that is taxed. Inflation is currently about 2.5 per cent so the net is disastrous.
Clearly, governments have designed policies to assist borrowers not creditors. Our central bank, the Bank of Canada, along with the central banks in the United States and Britain, have depressed interest rates so that over more than three years investors have nothing to show for the money saved.
Bond yields of almost zero reflect the market’s belief that interest rates will remain at these very subdued levels for some time, and also that the economy at best will be flat. It is no surprise then that Towers Watson, an adviser to major pension funds, characterized bonds as “highly unattractive at the present time”.
In addition, governments have resorted to money printing and huge deficits so the debt burden will appear to be less worrisome. All but ignored is the fact that at some point inflation will erode the value of the principal placed in any form of savings account.
Apparently, the possibility of defaults is being disregarded.
Certainly, obligations of the countries in a precarious financial situation such as many European nations are hazardous. It is unlikely that Canada or the United States will renege on their commitments.
Yet, Jeffrey Rogers Hummel and Arnold King of George Mason University, reiterate that governments eventually will default because politicians never will agree to any deficit-cutting program.
Hence, perhaps one should not dismiss the risk of default as negligible.
Other investment possibilities are fraught with pitfalls. For instance, Yale University in the United States placed endowment funds in such exotic places as a Chinese retail chain and Russian timberland. Subsequently, that endowment fund dropped in half in the past decade.
Given the foregoing, this is an extremely difficult period for those who work in the investment industry, and consequently for the public as well.