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Seven years on ... There are lessons that can be learnt from the GFC. Picture: Supplied.
SEVEN years ago there were dark days in the investment world. Dark days indeed.
The scariest part of the Global Financial Crisis was probably September 2008 — when giant US investment bank Lehman Brothers collapsed and Aussie shares plunged 25 per cent in just over a month.
Our recovery in the past seven years has been rocky, recent falls have pushed the All Ordinaries index back to 2006 levels, and there are mixed views about where it’s going next.
While rising share dividends have boosted investors’ overall returns, that’s little consolidation to retirees who live off their dividend income and people who borrow to invest, who have seen zero growth in many of their stocks for almost a decade.
Despite the uncertain outlook, some valuable investment lessons have been learned. Here are seven of them.
Slowly recovering ... It has been a rocky road to recovery for Australia since the GFC. Picture: Supplied.Source:Supplied
1. NO STOCK IS SAFE
When sharemarkets plunge, there is no escape. Even the strongest, most conservative companies — such as our major banks — lost more than half their value in the GFC, but have bounced back strongly since then.
2. SHARE YOUR LOVE
Diversification is a must — across different shares, sectors and types of investments. You’ll still feel pain in the short term as almost every asset class sinks in a crisis, but spreading your money around will smooth your returns and protect you from losing everything.
3. FORECASTS ARE JUST GUESSES
Experts are everywhere these days but a big lesson of the past seven years is that they often get it wrong. During the GFC some said “buy up big†just before shares slumped another 30 per cent. A few years ago some urged people to sell bank shares — just before they surged 30 per cent. Listen to forecasts but don’t expect them to come true.
Think wisely ... Reduce the level of risky assets you have as you age. Picture: Jenny Duggan.Source:News Corp Australia
4. GREED IS GOOD WHEN FEAR IS EVERYWHERE
Billionaire investor Warren Buffett’s famous line to “be greedy when others are fearful†rang true during the GFC. Investors who dived in during early 2009 when everyone else was running for the exits have enjoyed great profits since then. However, trying to pick the bottom of the market is risky, so take small bites when buying rather than going all-in.
5. DIAL DOWN RETIREMENT RISK
Retirees who’d built a small fortune in shares during the 2000s got smashed in the GFC and many haven’t recovered. Some lost everything because they were urged to borrow against their homes to buy shares that promptly sunk. A sharemarket slump close to your retirement date can cause permanent damage to your nest egg, so reduce the level of risky assets as you age.
6. CASH IS LOSING YOU MONEY
We’re in a low interest rate world and savings accounts are paying less than 3 per cent interest, not much more than inflation. Those savings then get taxed at your marginal tax rate, so it’s likely any cash investments you have are going backwards. Debt reduction or — if you can stomach it — quality shares are a better long-term destination.
7. PATIENCE PAYS OFF
If you stuck with a variety of quality blue-chip stocks between 2005, you’re better off than you were and have been receiving steady, growing dividend payments for a decade. The historical performance numbers for shares don’t look as rosy as they used too, but they still beat most other investments hands down.