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Thursday, January 19, 2012

MAKING SERIOUS PLANS IN A CHAOTIC ENVIRONMENT


The financial world can be a volatile place. These days major changes that have far reaching impact your finances can take place in the twinkling of an eye.

When I think about the speed with which conditions change I’m always reminded of March 6, 2008.  Shares of the nation’s fifth largest investment bank had dropped nearly 20% in the previous ten days.

Ten days later Bear Stearns was swallowed up by former competitor J.P. Morgan Chase.

The period immediately following World War II up until at least 1980 was probably the most continuously prosperous period United States history. Chances are, those whose working careers spanned that period firmly believe that future generations will never have it as good as they had it.  And I'd be inclined to agree with that opinion. 

Think about it. Back then there were no economic challenges coming from India, China, or Brazil let alone Lithuania, Egypt, Nigeria, Qatar and others.  Industries that the U.S. once dominated are now largely outsourced to other countries.

The Crash of 1987
The Dow hit a new high on August 25, 1987 at a record 2722.44 points. Then, it started to head down. On October 19, 1987, the stock market crashed. To be exact, the Dow dropped 508 points or 22.6% in a single trading day.
During this crash, 1/2 trillion dollars of wealth were erased.


The Crash of 2000
During the dot-com boom period from 1992-2000, the markets and the economy experienced a period of record expansion.  The NASDAQ peaked at 5132.52. Conversely, the end of the dot-com prosperity boom led to many dot-coms running out of capital and were eventually acquired or liquidated.
A total of 8 trillion dollars of wealth was lost in the crash of 2000.


The Great Recession (late-2000s financial crisis) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.  As a result, national governments had to bailout major banks, large financial institutions collapsed, and stock markets around the world endured severe downturns. In many areas, the “mortgage meltdown” all but destroyed housing market, leading to numerous evictions, foreclosures and prolonged unemployment.
Since peaking in the second quarter of 2007, household wealth is down $14 to $16 trillion.


It has been stated that the housing market (especially new home construction) is a major contributor to the health of the U.S. economy. 

With this being the case my question is simply, “How can any sane individual commit to a 30 year financial obligation when the U.S. economy tends to undergo major dislocations every 5-15 years?”



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