TITLE

The Perfect Storm

AUTHOR(S)
Jahnke, William
PUB. DATE
June 2005
SOURCE
Journal of Financial Planning;Jun2005, Vol. 18 Issue 6, p22
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The article presents financial planning strategies and trends in managing a simultaneous collapse of stock, bond, and real estate prices with inflation reducing the purchasing power of ravaged investment portfolios. At the heart of this scenario is the prospect that foreigners will stop financing the profligacy of the U.S. government and U.S. consumers. This perfect storm is an increasingly likely consequence of large and growing current account and fiscal deficits. The risk of the financial crisis is accentuated by current high valuations for stocks, bonds, and real estate. Falling interest rates produced by years of Federal Reserve expansionary monetary policy have resulted in extreme asset price inflation in stock and real estate prices. The wealth effect associated with asset price inflation has supported the growth in consumer debt creation and spending at non-sustainable levels. The potential financial crisis calls attention to the need for financial planners to model long-term return expectations and to consider how alternative investment scenarios can affect investment returns and the realization of client financial goals. The requirement to model investment returns from a forward-looking fundamental perspective is a generally unwelcome but essential foundation of financial planning. Capital asset pricing model risk management distinguishes between systematic risk (the risk for which investors as a group are compensated) and specific risk (the risk for which investors as a group are not compensated).
ACCESSION #
17543869

 

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