Old Investment Rules for a New World

Since the Great recession triggered by the global financial crisis of 2008/9, investing has been challenging. Eventually, central banks around the world dropped rates to the lowest levels for over 60 years to stimulate financial confidence and this pushed asset prices up. It’s been good news for investors but are those prices on false foundations? Do the old tried and true investment rules still apply?

Spread your risk

Different asset types behave in different ways and this can work for you. Diversifying your portfolio is unlikely to avoid nasty price falls but it is likely to reduce the damage. The markets for each kind of asset move in different directions and to a lesser or greater degree. So if you have differing types of stocks, property, interest bearing and cash in your portfolio, it can help you take advantage of low prices. In this way, a market crash can even be your friend. But…

Don’t flinch

Through all markets, over a century of history including the Great Depression shows the stock market has always eventually recovered to higher levels. The skill is to remain confident and buy well. If you do that and acquire a robust portfolio, then your patience should eventually be rewarded. You might even finesse by taking the opportunity to add to your holdings when prices are at distressed levels – i.e. after a crash.

Time in, more than timing

Timing when to buy assets can be important but a more reliable habit is to stay invested. Then just use the defensive part of your portfolio to gradually buy more growth assets when they’re cheap and gradually build up your defensive assets again as growth assets become expensive. Simple… but not easy.

Weather the risk

Our cave man evolution means we’re designed for ‘fight or flight’, which means we place higher emphasis on recent information than on longer history. The way this plays out for most investors is that we’re happiest with risk when we should actually be reducing it. And after a market crash we’re suddenly all risk averse when history shows it would be smarter to gradually buy more.

So how do you ensure you’ll have the courage when value buying is best? It requires a long view and some structural discipline to ensure you have cash reserves when they’re most useful. This is fundamental to how we add value for our clients, so ring us if you want us to help you towards better outcomes.

Confidently assess value

Our planet can’t support endless growth and in the last 200 years we’ve over-reaped its resources. So, sustainability is likely to cause any future asset growth to be at the expense of other assets, rather than all assets growing together by consuming Earth’s resources. In the stock market it is unrealistic to expect stock prices to rise endlessly. Prudent investors set a price at which they’d buy and another at which they’d sell – guidelines that need updating as relevant news unfolds. A simple concept but not easy.

Successful investors are more candid in their assessment of value. They avoid falling in love with an asset (house prices are but one example). So don’t be reluctant to take your profits when an asset that has been good, ceases to be so attractive.

Do take care with debt

Even when interest rates are low, remember they can move higher. Even if they don’t there is still the capital you’ll need to repay.  In the low growth/inflation era that seems to lie ahead, repaying capital will be much harder than during high inflation, which occurred from the mid 1970s. Inflation will not pay off the debt for you the way it did back then.

Debt can amplify growth for you but don’t forget that it will equally amplify losses. Banks sell debt and they’re rather good at it. But debt is best used when an asset is attractively priced or as a bridging strategy while you release some capital. It is likely that acquiring debt for tax deductions alone, may turn out to be unhelpful – saving income while losing capital. Negative gearing relies heavily on capital growth – without this, expect misery.

Established wisdom still applies

The world moved into recession 8 years ago and around the world a diverse portfolio offered limited protection. Normal ‘cause and effect’ investment behaviour was suspended while we worried whether the Great Recession would become another Great Depression. The global central banks’ experiment to artificially lower interest rates seems to have avoided this but now the challenge is to extricate ourselves from it. But the old rules still matter. So while observing contemporary differences, creating wealth is still best done by diligently applying established wisdom.

If you would like to discuss the information in this article or your investment options with one of our wealth management professionals, get in touch today!


Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.