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December 27, 2010

Interactive Maps on Global Interest Rates

By Cindy Ivanac-Lillig

I realize that many of us of are visiting with family and friends this week, but I thought I would post a link to a great interactive map from the Wall Street Journal in case you are looking for a break from all the merriment.

This map shows all the central bank rates on a monthly basis for the last six years. It is fascinating. And actually, I think the last six months of 2010 are particularly interesting as there seems to be a lot of "holding" indicators. Check it out and you'll see what I mean.

To those of you celebrating Christmas this week, Merry Christmas.

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December 17, 2010

“Assuming an 8% return…” Really?

By Cindy Ivanac-Lillig

I recently came across a number of classroom tools and curricula that are designed to teach the power of compound interest with statements like, “Assuming the annual return on your investment is 8%, calculate your earnings.....” Being a finance major many moons ago, I am pretty familiar with investment rates of about 8%. This would have been a pretty run-of-the-mill assumption according to most of my academic texts. If any of you are involved in personal finance education or have just worked on your company's 401K calculator, this rate of return may seem familiar as well.

But, is 8% realistic as a long-term rate of return on the stock market? Don’t we teach our students in economics that our long-term growth rate is somewhere in the 2-2.5% range? Now, granted, we are living in a globalized financial world, but this assumption that is codified in our lesson plans as somewhat modest may need some re-examining.

The idea that investors should expect 8% and students should on some level compare bank account savings rates with 8% seems misplaced. It is true that over the last century, 10 and 20-year investment returns bounced around somewhere between 5 and 15% -- but let’s remember that this is at least 10 years worth of uninterrupted investment. And, if you were the unlucky person who retired at the end of 2008, you saw 25% of your investment vanish in weeks.

I am not advocating we stop teaching about the stock market, on the contrary I am advocating that we teach about effective decision making and the fundamentals of economic growth. The stock market is not magic. It ultimately drives investment in the production of goods and services. It cannot grow sustainably without regard to the health and pace of the global economy. Long term growth of the stock market is tied to the long-term growth of the world economy. Students can and should be taught to think critically about this. And folks that put out tools to teach compound interest should be careful to not treat stock market and savings accounts similarly especially in rather short time horizons.

They say that the stock market is forward looking. I think the trick may be to help students become more forward looking….

What do you think?

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