Where to from here?
Posted: December 03, 2008
The impacts of the global financial crisis and economic slowdown appear daily in the media and it is easy to get the feeling that we are sliding down a never ending slope. But you need to look beyond the news to see what is really happening.
Impact of the credit crunch: Normally, businesses and governments borrow funds to partly finance their activities. Banks also borrow funds to increase their capacity to lend. But progressively during 2008 the ability to borrow became much harder and significantly more expensive as lenders became more cautious and their focus turned inward to strengthen their balance sheets. This is only a temporary problem because governments and regulators are committed to implementing solutions.
Diversification: The financial meltdown has had an impact on all asset classes, so it may appear that diversification isn't working. Shares and many property assets have fallen in value, and interest rates on bonds and cash are coming down. This is a temporary problem because sooner or later, mispriced assets will be valued according to their relative income potential.
Asset values: No-one knows what the future holds, so all asset valuations are basically informed guesses. Sometimes we can be confident about the future, however at the moment it is difficult to be sure what assets are really worth. But one thing is for certain, many assets are a lot cheaper today than they were a year ago.
Emotions: Many investors are driven by fear or greed. This has always been the case and it will remain that way. Some investors are fearful that asset values will fall forever and will sell at just the wrong time. When markets have risen strongly some investors get greedy and increase their exposure at just the wrong time. Experienced, successful investors are less fearful, less greedy and most of all, they are patient.
Pain: The current crisis is painful. Some people have lost their jobs, others are weighed down with too much debt or forced to sell assets at low prices. In many instances businesses and individuals have had to significantly curb their expenses. This pain is temporary because nothing lasts for ever. The good times will return (and so will the bad). It is wrong to project today's conditions into the future because we know many of the current problems are temporary.
What to do? If you have a well developed strategy, it will cope with volatility and uncertainty. However, portfolios should be reviewed and re-balanced to maintain the intended strategy. If you are retired and have sufficient cash and income from your investments to meet your needs, your strategy may not need to change. If you are not yet retired and have sufficient cash and income for day to day living and to service your debts, your strategy may still be appropriate. If you have surplus cash there are opportunities to explore.
No matter what your position your Avenue adviser is there to help you navigate through these challenging times.