I started my career as a Financial Adviser 3 years before the financial crisis of 2007–2008. Also known as the global financial crisis (GFC) and the 2008 financial crisis, its considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. We are now 10 years on from the collapse of Lehman Brother, which triggered the GFC, and it has made me think about what happened then, and since, that event.
The first thing is to acknowledge that many people were hurt in this time, as the share market, and subsequently, Interest Rates plummeted in Australia and many people have never recovered. However, the opposite is true as well, some people have prospered and gained wealth from that period. Why the difference?
Here are my observations;
- Pre GFC, returns were well above average for most share-based investments and superannuation funds. It was hard for investors not to be overweight in these investments because the returns were so good.
- Asset Allocation for a lot of people was too aggressive, especially for retiree’s and pre-retiree’s. Again, this was due to the great returns in the three years before hand and people thinking it would last forever.
- As soon as the markets dropped, people sold. Selling in a down market is never a good thing, but people were either scared or needed the money to live off.
- People have left their money in cash for the last 10 years and missed the recovery since then.
So how do you protect yourself from future GFC’s and Corrections.
- When markets crash, as they do, hang in there. All you do when you cash out is turn a paper loss into a real one.
- Have a strategy that suits you as an individual and your Risk Profile. If you invest too heavily in growth assets you can get burned, but not enough, and you can miss necessary returns. It has always been about getting the balance right.
- Diversify your investments. I see so many people that have the clear majority of their savings in either cash or property. If anything happens to this market, they are exposed to either crises like the GFC or more likely extended periods of low to no growth. Can’t happen?! Have a look at what happened to property prices in the USA because of the GFC.
- Keep enough cash or liquid assets to ride out a GFC type event, and possibly capitalize on them by being in a position to buy when everyone else is selling.
- If you are accumulating wealth, keep your discipline and keep investing.
I believe it is important to try to keep emotions out of financial decisions. Unfortunately fear and greed are the driving forces of markets and which is why they behave the way they do. It is hard to stop the herd when they have been spooked, or they see better feeding grounds elsewhere. However, if you employ a good financial plan, doing the basics I discussed, you should be able to invest with comfort of knowing you have your bases covered.
– Brendan Hoy
If you would like to read further on the GFC, the Reserve Bank of Australia goes into great detail of the how and the why in this article.