This is my third financial crisis as a financial advisor. The first one was the dotcom crash in 2000. I wasn’t long out of college and new to working as an advisor; very much learning my trade and working in a back up role. So no one was calling me about their pension or investment.
The 2007/ 08 crash was very different. I was dealing with clients directly and making recommendations on investment strategy. People’s reaction to the crash of 2008 is a lot different than it is today. I like to think that this is because people (me, as an advisor) have learnt a lot from 2008 that means they are reacting differently now.
In 2008, people spent like there was no tomorrow. Money went on holidays, cars, property, pensions, investments. There was no such thing as a rainy day fund. What would you need one of them for? It’s never going to rain. So when it did start raining, there was a panic and funds were liquidated for cashflow.
In 2020, when people look to invest their money, they ensure that there is ample cash in the bank if they need it. Although interest rates pay nothing, cash is the safety net that you need so when there is a crash, you don’t need to liquidate positions to have money to pay the bills.
In 2008, there was never any talk of downturns in the market. It was only about the upside and with markets growing strongly, no one wanted to hear about it anyway.
Today, we concentrate more on discussing the downside of any strategy than we do on the upside (no one ever gives out if their investment is growing by too much). While we only know what someones reaction to a market crash will be when it actually happens, investors are prepared that there is going to be a crash at some stage in their investment period.
The Irish equity fund was one of the best performing funds available. As were funds that invested in India and China. It wasn’t uncommon to make 100% in a year. People just followed these high returns.
Today people are a lot more diversified, invested across the globe in a strategic way. Using indexed funds which use global market capitalisation as a framework means your money is spread out based on the size of global markets.
in 2008, we just wanted the biggest returns we could get for our money. We didn’t even consider the level of risk that was involved. If something went up 100%, we wanted some of that.
Risk and return are related. The higher the levels of expected return you want, the higher the level of investment risk you are taking and that means an increase chance of losing all your money. We now understand that Irish banks are in the category of “small cap” companies which are higher risk than Large or Mega Cap companies such as Microsoft and Apple. The more ups and downs you are willing to tolerate, the greater the expected return. But that means it may not work.
In 2008, people were swimming in debt. Banks were throwing money at people, inviting people to events just so they could tempt them to take on more debt. It was easy to remortgage and release equity in your home to pay for other properties and fund new cars and your holidays. Everything was being paid for on the never never. Investment funds introduced gearing where they would invest double the amount you invested through borrowing. Large properties deals were put together through stockbrokers using mezzanine finance and very little paperwork.
The debt problems created in the last crash still haven’t been fully addressed with lots of people still dealing with their banks. People want as little debt as possible and are encouraged to do so.
In 2008, lots of different types of investment schemes were popping up. The global economy was doing so well, returns on investments were double digits. There was little paperwork to complete and people didn’t understand what they were investing in. It was only when it stopped working and they received bills for worthless investments did they wake up to what they put their money into.
Things are a lot simpler now. Avoid investments that you can’t explain to your mother. Use equities as the main growth driver as they are liquid and will turn around quickly after the recession is over. Invest in quality companies that will be around for a long time.
Let’s also remember that we will come through this. We do not know when or how bad it will be but we will recover over time.
If you have any questions, drop me an email at email@example.com