For investors who have been there when it happened, at times
it feels like yesterday, also it may feel like it never happened, especially
when we are looking at the set of economic data we have at hand today. Whether
or not the pain of losses has turned into a distant memory or still lingering,
we think everyone would agree that these kinds of big events serve as important
lessons for understanding how we will perceive the investment landscape, and
thereby shaping our mindset as well as thought process on how we will navigate
the future. In this article, we look to share 8 lessons investors could take away 10 years after the 2008 Global Financial Crisis (GFC).
#1 Fear wins in the short term and loses in the long term
Last year’s tremendous bull run across global equities have rekindled fears of an equity market peak is reaching, and according to what we are looking at so far this may be true (except for US, which has continued to do well on the back of corporate tax cuts and robust economic momentum). If history is any guide, financial markets appears to be a function of irrational short-term beliefs inside of a one-way upward trend of progress. While there are plenty of times to be fearful, the high probability bet is that optimism will generally beat pessimism.
Why buying at peak may not matter after all
#2 Behavioral biases hurt investments
Occasionally, we have written a few pieces on behavioral biases to caution investors of the state of mind that they are in while making investment decisions. Although market analysts along with economists get a lot of things right in the long term, they can get a lot of things wrong in the short-term. Being investors ourselves, nothing drives these errors more than behavioral biases. The list of behavioral biases is not exhaustive, understanding and learning to overcome them is an essential part of any good investment education.
#3 Politics in investing is poison
Malaysian investors are likely to find themselves relatable to the word “politics” in 2018 than any other periods over the past 10 years. The first figure crossing our minds is inevitably Donald Trump, where his opinions have influenced much of the movements of global equities this year. The second relatable incident would be Malaysia’s 14th General Election, where we witnessed the first change in ruling party after close to than 60 years of independence.
Given that politicians are often deemed as the rule makers of the fiscal system, their decisions can have implications on economies, but allowing one’s investment decision to be dictated entirely by the movements or thoughts of these people seems to be putting the cart before the horse. When it comes to investing, there are bigger trends at work and other important areas to look at.
#4 Past performance is no guarantee of future results
Investors who have lost their fortunes during GFC have the tendency to search for portfolios that handles the ups and the downs of the markets flawlessly. Strategies that have performed well during the period have witnessed high demands, but then again it also means investors could be solely chasing past performance. Therefore, we think it is crucial for investors to understand that crises tend to rise from unforeseen circumstances. As such, investing in a portfolio that has performed well during the past crises can never guarantee its resiliency in the upcoming (if any) crisis.
#5 Active Management vs Autopilot
Earlier this year we have put up
a piece to make a case for portfolio monitoring, echoing our thoughts on employing actively-managed strategies will remain relevant for investors in many years ahead. Reiterating our view, staying invested for the long term is different from investing in a portfolio without making any necessary adjustments over the next 5 years. At times of elevated volatility and valuations aren’t looking cheap across the board, active management allows investors to shun more expensive equities in favour of more attractive ones.
#6 Short-termism kills portfolios
10 years went on swiftly, it also tells us how far we have moved on since then and reminded us that life is short. In times of volatility people tend to shift their portfolios in a manner that was irrationally short-term. Looking across market history, the markets have not only witnessed many bears, but also many bulls. These bulls have taught us that most of the assets that we invest in are inherently long-term instruments. Give these assets enough time to grow and portfolio managers to do what they’re supposed to do. Ultimately, thinking in irrationally short-term or long-term perspective is usually a recipe for disaster.
#7 Keeping An Open Mind
To absorb the many investment lessons available out there, one requires a very open mind. For instance, looking bluntly at the trillion’s worth of Fed balance sheet and record-high US government debt alone may led to the thoughts of hyperinflation and overwhelming liquidity. At this juncture, we know that’s not the case, ironically Fed was still having a benign inflation “issue” last year. Crises have thought us that things aren’t always as simple as they appear. Knowing both many sides of a single story tends to help us understand the situation, allowing us to make better investment decisions.
#8 Keeping a watch on the monetary system
Humans have created the monetary system. There are a number of components (e.g. central banks, policymakers, financial institutions, consumers etc.) in this system and rules in place to dictate how these components interact. Being part of the monetary system feels like playing a role of a tiny small part within a vehicle. Along the journey, accidents do happen, and its mostly attributable to driver’s mistake. During the journey, it may be difficult to understand what’s going on in the driver’s mind, but we think investors are able to formulate a set of probable outcomes by understanding the vehicle.