The Global Financial Crisis was the worst financial crisis since the Great Depression, resulting in banks freezing lending, financial institutes requiring rescue and 50% plus share market falls. As we enter the tenth anniversary of the GFC, Dr. Shane Oliver reflects on the key lessons for investors from the GFC:
- The inevitability of cycles: long periods of good growth, low inflations and great returns are always followed by something going wrong.
- While each cycle is different, markets are pushed to extremes of valuation and sentiment. Patient investors could be provided with opportunities here.
- Higher returns come with higher risk. Risks may not be immediately apparent, but will invariably make their appearance at some point.
- Be sceptical of financial engineering or hard-to-understand products. The GFC showed us that the biggest losses for investors were in products that no one actually understood.
- Avoid too much gearing or gearing of the wrong sort. Gearing magnifies gains as well as losses.
- The importance of proper diversification. While listed property trusts and hedge funds were more popular alternatives than low-yielding government bonds prior to the GFC, through the crisis they ran into big trouble, and government bonds were the star performers.
- The importance of asset allocation. The GFC reminded everyone that what matters most to your investments is your asset mix.
You can read the full article here: Oliver’s Insights – Seven lessons from the Global Financial Crisis for investors
Dr. Shane Oliver is Head of Investment Strategy and Economics and Chief Economist at AMP Capital.