Terry Mitchell

Have Financial Markets Incurred Permanent Damage?



Posted: Wednesday, February 11, 2009

by Terry Mitchell
http://commenterry.blogs.com

During this latest round of economic woes, our financial markets may have incurred permanent damage. Even after a complete recovery, who will be able to look at them quite the same again? Indeed, I believe most investors have become a little more cynical and suspicious as result of the current recession and related setbacks that we have been experiencing for the last six months.

After what has happened to Ford, GM, CitiGroup, Bank of America, Nortel Networks, Circuit City, and others, who can blame anyone for refusing to believe ever again that there is such a thing as true blue-chip stock. All of these companies were high-fliers, but have now seen their stocks either become worthless (as a result of bankruptcies) or drop to just small fractions of their former values. No stock, no matter how solid it has been for decades, will likely be seen in the future as a bulwark against troubled times.

Then we've seen all of those formerly high-performing mutual funds (some having never previously recorded a down year) retreat wildly into negative territory, losing up to 40% or more of their value in 2008 alone. Funds like these comprised the lion's share of many people's 401(k)'s, IRAs, and other retirement accounts.

People will no doubt begin to wonder about the safety of any mutual fund that is primarily equity-based, even for the long term. The thinking will be like this: What good is a fund that produces 10% gains for five straight years if it is going to lose 40% in the sixth year?

In addition, financial gurus, fund managers, professional investors, and stock brokers will have difficulty regaining any kind of widespread trust. Obviously, the Bernie Madoff scandal didn't help, but that's not their only problem. Our current market conditions have called the honor of even the most honest of them into question, and made the most intelligent of them look foolish. The next time one of them makes a prediction or some kind of recommendation, who's going to take it seriously? I would dare say very few.

The bottom line is that our financial markets will likely never be the same after the first recession of the 21st century. But there is a bright side. Despite the damage that may be been sustained, the markets might actually become more stable in the long run. People will just have to take a more realistic approach to investing, and that will include putting a lot more into savings.
 
Terry Mitchell is a software engineer, freelance writer, amateur political analyst, and blogger from Virginia, USA. He posts a least one article a day to his blog - http://commenterry.blogs.com - on subjects such as current events, politics, technology, society and culture, religion, health and well-being, self improvement, personal finance, trivia, and sports.

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