January 2008

The drumbeat of negative economic predictions continues as more forecasters predict that a recession began late in 2007 or will arrive early in 2008.

The latest convert is former Federal Reserve Chairman Alan Greenspan, who recently put the odds of a recession at 50% or better.

The U.S. economy has been expanding since the last recession ended in 2001 and signs that the economy have slowed are evident in corporate profits and the housing market.

Recessions can cause sizable temporary declines in portfolio values.

How bad can it get?
Recessions have a nasty habit of taking stock market profits away, at least temporarily.

The U.S. stock market, as measured by the Standard & Poor’s 500 Index, has fallen an average of 26% during the 11 recessions since 1945.

How concerned should an investor be? At least recessions are short-term events usually over in a year or less.

The average recession since 1945 has lasted only 10 months, vs. the average 57 months of economic expansion, says the National Bureau of Economic Research, the group charged with declaring the beginnings and ends of recessions.

The longest since World War II were the 16-month declines in 1973-75 and 1981-82. The most recent recession, in 2001, lasted just eight months.

Reasons for calm
An investor who has a balanced portfolio that includes stocks, bonds, and cash and who has a time frame of more than two years shouldn’t be too concerned.

Although stocks often (but not always) fall during a recession, bonds usually perform well, keeping a balanced portfolio from falling as far as the stock market.

Sometimes cash investments generate high returns, as in 1973-75, and also shelter the portfolio.

Anyone investing new money should welcome the temporary declines that come with a recession, because they get to buy more shares at cheaper prices.

The stock market recoveries that develop at the end of recessions can quickly erase the previous declines.

For instance, the S&P 500 rose by 37% in 1975 and by 30% in 1991 after recessions drove the markets down.

A lot of parents are apparently in the dark when it comes to preparing for the costs of a college education, a new survey by Fidelity Investments found. The survey of 2,200 families with children under age 18 found that half started saving only after the child was four years old, thereby losing several years of compounded returns. Only about 26% used a state-sponsored 529 plan for college savings, despite the tax advantages offered by the plans, the survey found. About 21% had never even heard of the plans.

Broker funds lose out
The timing of investments by investors who purchase mutual funds through stockbrokers lags behind a simple buy-and-hold strategy, found a study by three college finance professors.

Investors who used brokers to buy funds with deferred sales charges known as B shares had particularly poor timing, lagging behind a buy-and-hold strategy in the same funds by almost 2.3% annually, the study found.

Pensions fade away
Traditional defined benefit pensions are becoming scarce, said a survey by the Employee Benefit Research Institute.

It said employers are finding it more expensive to comply with new federal rules on the plans. A growing number of employers are freezing the plans and prohibiting new hires from joining them. Typically employers are expanding their 401 plans instead, it said.