History teaches us many things. Particularly if we’re looking for a bit of guidance in prudent personal financial management, the last decade offers us a wealth of useful lessons.
During the last decade we’ve seen a (hopefully) once in a lifetime global economic collapse, the entire banking system teetering on the brink, followed by a deep recession. However thankfully now in Ireland (although unfortunately not in every corner of the country), we’ve seen a strong recovery in recent years to a point where it appears the boom times are back! So what can we learn from all of this, particularly as we hear that dreaded “boom” word??
Be careful who you listen to
Let’s start with the European Central Bank’s Monthly Bulletin of March 2007 that said,
“Looking ahead, the medium-term outlook for economic activity remains favourable. The conditions are in place for the euro area economy to grow solidly. As regards the external environment, global economic growth has become more balanced across regions and, while moderating somewhat, remains robust, supported in part by lower oil prices. External conditions thus provide support for euro area exports. Domestic demand in the euro area is also expected to maintain its relatively strong momentum.
"Investment should remain dynamic, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong corporate earnings, and gains in business efficiency.”
Well, how about that! Within a few short months the global economy started to implode, and the whole EU project faced desperate times with the emergence of the PIIGS economies – do you remember them? These were also the days of Dublin taxi drivers boasting about the 3 properties (never to be built) they had bought for a song on a beach in Bulgaria.
So be careful who you listen to and be very circumspect about market noise and the latest “sure fire” investment opportunity.
Keep a long-term perspective
When you are looking at your pension fund, or your risk rated investment portfolio, you need to maintain a long-term focus. There’s always a huge temptation to try and time the market, but this is folly.
The people who suffered most in the economic collapse were those who had no plan and tried to call the market. These people typically sold assets such as shares or property after significant falls in value and then after suffering so much, were very slow to re-enter the market and missed most of the recovery. In fact, stock markets had pretty much fully recovered in 2011, but many people were out of the market for much of the recovery period and their portfolios did not recover. In fact the S&P 500 rose by almost 200% (196.2% to be exact) from the eight years from March 2009, rewarding people who stayed invested.
People with a plan typically stuck to it and avoided making short-term calls. They did not make large scale asset movements and as a result they experienced the collapse, but more importantly also the recovery in the markets.
Diversification is key
Back to those Dublin taxi drivers, and many other people in Ireland, this is one lesson in particular that was bitterly learned. Ireland’s love of property above all other assets hit many people very hard. No matter what your investment objectives are, it is very important that you protect yourself by not being over-exposed to any one asset category in particular.
Keep emotion out of it
If investing were a science then there would simply be a formula for success. We all know this is not the case. Our successes (and failures!) are strongly affected by uncontrollable market factors, which emotionally affect us and cloud our judgement.
The people who tend to suffer most are those who exhibit extreme emotions in relation to investing. Being too greedy is a recipe for disaster in a rising market, as these people often don’t take the opportunity to lock in any gains. In a falling market, excessive fear is also a big enemy as people exit the market and are too fearful to re-enter, thus missing a market recovery. The answer is to make investment decisions on logic alone…both yours and that of your adviser!
Have a safety net
The economic collapse resulted in a lot of pain for many people, with salary reductions and a large increase in unemployment being two of the most unwelcome effects. For these people, cashflow became an immediate issue as their non-discretionary outgoings (such as mortgage and other loan repayments) typically did not reduce in line with the fall in income. This caused significant issues for people with no cash buffer as they struggled to deal with banks and other creditors, resulting in significant financial pressure, stress and a dramatic fall-off in their lifestyle. Going forwards, many people have prudently prioritised a cash (or other liquid asset) buffer as one of their investment objectives.
Don’t go it alone
As people saw their portfolios collapsing and faced uncertainty about their financial futures, it became more and more difficult to make rational decisions. This is where a trusted voice became extremely valuable and for many, that voice was their financial adviser. We’re able to stand back, remove the emotion from the situation and provide clear thinking in a difficult situation. Sometimes the advice might be to do nothing. For others, we can help you face up to your situation and plan on how to deal with it.
Having that second opinion, apart from the positive impact it will have on your financial wellbeing will also seriously reduce your stress levels!
So in summary, our advice is to have a financial plan and stick to it. Tune out of the market noise and watch the horizon rather than the next hill. And let us help you to keep emotion out of your decision making and to stay on the right track.