Daily Aid 55: Financial market stability explained

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Daily Aid 55: Financial market stability explained

23 December 2008 1 views No Comment

Daily Aid 55: Financial market stability explained

Student Financial Aid News

Moody’s Investors Service warned Monday that colleges with variable interest rates on their debt may face additional risks in light of problems with credit markets and the economy. The report, “Risks of Variable Rate Debt No Longer Hidden,” notes that 73 percent of private colleges and universities rated by Moody’s issued at least some variable rate debt, and 29 percent of those institutions issued at least 50 percent of their bonds with variable debts.

Commentary

Markets are slowly recovering, which is a good sign. We’ll see if they continue their path towards recovery after the new year. Right now, one of the factors bringing a level of stability to financial markets is that hedge fund investors are prohibited from withdrawing money from their investments for the rest of 2008, beginning on November 30.

If that last sentence made no sense, here’s a quick explanation:

A hedge fund is a private investment fund run by managers and exclusive, typically for people who have a lot of money to gamble in investing. Because they’re private, what they do is not subject to as much regulation as, say, a college investment fund or a retirement fund. It’s like a private casino where the payouts can be bigger, but the table minimums are bigger, too, and the police don’t show up as often.

What happened in the last quarter of this year was that a lot of investors in these private funds got especially nervous and started pulling their money out of the funds, typically at the end of the day on the stock market. That’s why you saw such wild swings in the market in the last hour of each day. However, hedge funds can stop withdrawals with sufficient notice, and virtually all funds said that after November 30, 2008, you can’t withdraw your money until 2009 – you have to let it ride, no matter how the market goes.

Without the frenzied selling at the end of the day, the market volatility measure known as the VIX has been on a slow and steady decline:

A reminder – the higher the VIX number, the more unstable the market is.

You can see that not only has the VIX – a measure of how volatile the stock market is – been declining, but the wild peaks and troughs in the chart are much smoother once hedge funds stopped withdrawals for the year.

What does this all mean for you? For anyone with investments, be they retirement or college funds, the reduced volatility in the market is good – it means there’s less panicked selling, fewer stocks taking a beating for no rational reason, and a little more calm. Combined with the holidays, I’m hopeful that this enforced month-long respite from panic trading does the economy some good, so that when 2009 starts up, financial services people will be working with cooler heads – and that’s good for everyone.

What should you be doing? As we head into 2009, now is a great time to look at your personal finances before year-end. We’ll explore more year-end personal finance topics next week.

Scholarship Update

The AnyCollege.com Scholarship is a $2,000 award that is given away once per quarter (4 times per year) by random drawing. Deadlines for each drawing period are March 31, June 30, September 30, and December 31 of each year. To be eligible, a student must be planning on attending a previously unattended institution of higher education. This includes new students, transfers, and graduate students. Students must be at least 13 years of age and must use the award within 5 years of winning.

Details at our free college scholarship search site.

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