Frequently Asked Questions
Last update: October 2, 2008
1. Why should I invest in stocks at all? Why not move into cash?
Cash is certainly less risky and volatile than the stock markets. However there are still risks:
- Interest rate risk: Interest rates are low, so there is a real risk of low returns that will not support your life goals;
- Credit risk: The Asset Backed Commercial Paper (ABCP) crisis has locked up the savings of many individuals who were unaware of the risks;
- Daily Lifestyle Risk: Keeping your savings in cash will lower your risk, but this also means lower returns. Individuals would need to counterbalance this with a personal austerity programme: higher personal savings and less personal spending.
2. What are you doing to protect my assets?
Asset allocation involves determining the portion of your investment portfolio attributed to low-risk assets. This is the Fixed Income portion of your portfolio, which holds investments such as:
- Short-term government bonds
- Real-return bonds
- GICs
- High-quality corporate bonds
The value of the Fixed Income portion of your portfolio does not rise and fall with stock-market fluctuations.
The fixed-income portion of your portfolio should be considered as the portfolio “stabilizer.”
3. Are we heading into another Great Depression?
There are two important distinctions to make between the Depression of the 1930s and the current financial sector crisis:
- As we mentioned in a recent communiqué (Sept 17, 2008 www.pwlcapital.com), there is heavy intervention from central banks and governments in the financial markets today.
This was not the case in the 1930s.
- There is cash available, but it is sitting on the market sidelines. In the US alone, The Wall Street Journal states: “Furthermore, U.S. nonfinancial companies have just under $1 trillion in cash on their books.” (Sept 30th, 2008).
In the 1930s, cash liquidity was rare.
4. Can the US stock markets go to zero?
No. The stock market is comprised of thousands of companies. There will still be some value in these companies.
5. What is the risk to the Canadian banking system?
The structure of the Canadian banking system is different from the U.S. system. The foundation of the Canadian banking system is more robust, given our tighter regulatory requirements and oversight by the federal government. The Canadian Bank Act created a regulator for Canadian financial institutions, called the Office of the Superintendent of Financial Institutions (OSFI), which supervises, monitors and audits all Canadian banks, financial institutions, and pension plans.
http://www.infosource.gc.ca/inst/sif/fed04-eng.asp