Six years after the start of the financial crisis, what lessons should we have learnt?
1. Plan for the unexpected
Many believe that markets are much safer today than they were six years ago, thanks in large part to the numerous regulations and safeguards put in place to avoid a repeat of the financial crisis.
Nonetheless, risks by definition are unexpected. In the run-up to the financial crisis, very few people foresaw the risks lurking within the financial systems of the world’s largest economies.
The golden lesson for investors is to plan for and anticipate the unexpected. A good way to do this is by establishing a cash reserve or a ‘rainy day’ fund – a cash buffer will provide immediate liquidity to help weather unexpected risks or needs, while also providing the additional means to take advantage of investment opportunities when they arise.
2. Know your investment risk appetite
With lower returns a defining characteristic of the post-crisis landscape, it is more important than ever for investors to know their risk appetite. How much or how little investment risk you take, will determine the amount of return you might expect.
Prior to the financial crisis, many investors believed they were comfortable with the risk-reward profile of their investments. However when markets began to fall, they realised that they may have over-estimated their appetite for risk and sold out of the market, probably at the worst possible time.
3. Take ownership of your retirement planning
For most of the past six years, central banks have been propping up markets by injecting liquidity via economic stimulus programmes. This has benefitted borrowers, with interest rates remaining near zero. However it has also made it extremely challenging for retirees living on the interest from their investments. This has been further compounded by the fact that life expectancies are increasing.
Today, it has become more important than ever actively to engage with your retirement planning – for many retirees, it may be the case that longer life spans and lower interest rates mean that they need to take on more investment risk to generate adequate income.
Either way, with lower returns the ‘new normal’, it is more important than ever for us to take ownership of our retirement planning.
4. Investment should be a long-term process
Those who panicked in the wake of the 2008 falls and got out of the market may have avoided some of the worst falls, but chances are they also missed out on some stellar growth. Since 2009, markets have enjoyed an unabated move upwards, albeit with some bumps along the way.
Those investors who kept faith with the market and adjusted their portfolios accordingly will now be sitting on some very healthy gains – testament to the fact that investment should be a long-term process.
5. Debt needs to be managed
Over the past six years, economies and consumers alike have had to deal with the debt binge of the so-called ‘boom years’. One of the key reasons why the UK Government is reluctant to increase interest rates is concern over whether consumers would be able to service their debts.
The Bank of England governor, Mark Carney, has said that the ‘vulnerable position’ of family finances means any interest rate increases will be ‘more limited and more gradual than in the past’. Households in Britain have a lot of debt and, for many, the debt they face – be it a mortgage, credit card or student loan – is the biggest obstacle to investing.
6. Even the experts get it wrong
Despite many economists claiming foresight into the financial crisis, few predicted the downturn before it was nearly over. In fact, the International Monetary Fund was taken completely by surprise by the financial crisis.
The good news is that thanks to the flexibility introduced in this year’s Budget, investors are now able to take greater control of their investments and retirement savings. As Chancellor George Osborne said at the end of his Budget speech: “It’s your money, you’ve earned it, we trust you to do the right thing with it.”
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You might not get back the original amount invested.
Past performance is not a reliable indicator of future performance.