6 Years On – what have we learned?

Think back 6 short years. A huge US investment bank that few people in Ireland knew much about called Lehman Brothers collapsed and started a shockwave in global banking that had huge ramifications in Ireland. Soon after, we saw the government guarantee scheme, followed by the collapse of Anglo Irish Bank and then the biggest recession in Irish history.

The recession has had enormous consequences for people in Ireland. However, some people have definitely been affected much worse than others. So as individuals, what are the lessons to be learned to best protect us against any future economic downturns?

Have a long-term investment strategy

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.

People with a plan typically stuck to it and avoided making short-term calls. As a result they did not make large scale asset movements and as a result, they experienced both the collapse, but more importantly the recovery in the markets.

Diversification is key

In Ireland in particular, this is one lesson that many people have bitterly learned. No matter what your investment objectives are, it is very important that you protect yourself by not being over-exposed to one asset category in particular.

A decade ago in Ireland, many people began to think that property was a one-way bet; that the only way was up! It was deemed disastrous to be “out of the market” as banks lent money with abandon and people over-extended themselves, buying in Ireland, the UK and then in more exotic places, some of which they knew nothing about. And then the global property crash happened. All those people who were invested only in property bore the brunt of the ensuing pain.

Debt must be carefully managed

A lot of the problems in Ireland were exacerbated by the easy access to credit, offered by the banks. Many people subsequently borrowed huge amounts of money, with little thought given to their repayment capability, assuming that capital growth would continue apace. The opportunity to make significant gains was there for highly leveraged individuals as the market continued to grow.

But unfortunately as the market collapsed, these individuals suffered greatly as their losses were multiplied in line with their high levels of leverage. Many have suffered to a point of no return financially and unfortunately face the loss of their assets and indeed in some cases bankruptcy. This has been a salutary lesson for all of us, to ensure our debt levels are manageable.

Keep emotion out of it

Investing is an art not a science. 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 issues, which emotionally affect us and cloud our judgement. These influences are many. Things such as random events, investor sentiment, market momentum and of course, plain, simple luck all have an unpredictable and inconsistent influence on markets. Analysts are always trying to rationalize these issues, define them and ultimately predict their timing and influence. This is of course nigh on impossible.

The people who tend to suffer most are those who exhibit extreme emotions. 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!

(Some) cash is king

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 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. They were able to stand back, remove the emotion from the situation and provide clear thinking in a difficult situation. Sometimes the advice given was to do nothing, often the right advice! For other people, their adviser was able to help them face up to their 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!


26th August, 2014

Posted In: Insights