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Over the past 18 months, we have only had a few weeks across the period when things have seemed straightforward. Since January 2022 – investors have had to contend with volatility caused by:
- Inflation concerns.
- Interest rate rises.
- The Invasion of Ukraine.
- Commodity price explosions.
- The cost-of-living crisis.
- Liz Truss’s mini budget.
- Global house-price declines.
Now, the next hot topic within the news is a “banking crisis” off the back of Credit Suisse and Silicon Valley Bank struggling.
I have read everything from “the next 2008 is upon us”, to “how to trade through a global banking crisis”.
So, what has happened?
Smaller more speculative banks have speculated too much and been caught out.
Far bigger, far more regulated and less speculative banks have stepped in to bail them out.
What happened in 2008?
- Banks were leveraged 25 to 1.
- Borrowers were given access to 125% mortgages on multiple properties simultaneously without verification of income or occupation.
- This debt was collateralised into bonds and sold as low risk to countless institutional investors.
- The derivative market created synthetic versions of these bonds and magnified their risk impact by 50x.
- When the mortgages became too expensive to pay, and house prices fell – borrowers couldn’t sell their houses to pay off the loans, which created a domino effect.
- House prices collapsed, bonds failed, the synthetic bonds failed and banks stopped lending to each other.
- If it wasn’t for government intervention, it would’ve been financial Armageddon.
- 3 years later markets had fully recovered and were making new all-time highs.
2023 is not the same as 2008.
The most frustrating thing about sensationalist media and news is the general misunderstanding between the motives of the writers and the motives of the readers.
Readers want to keep up-to-date with what’s actually happening – writers want clicks, they want to generate advertising revenue and they want the Kudos of maybe becoming a clairvoyant. This really is a conflict of interest between producer and consumer.
If a writer makes an extreme claim – and by a very slim chance they are correct, they brag that they saw it coming. More likely however, when it doesn’t come true – they just delete the article.
A perfect phrase that I like to use “Mr/Mrs X has predicted 12 out of the last 2 financial crises”. A broken clock and all that.
Something many are unfamiliar with is the increasingly common practice of newspapers using algorithms to write multiple articles based on the outcome of a single event – posting all of them and then deleting the ones that are wrong.
Perhaps we have now established that the, often unqualified, opinion of journalists definitely don’t translate to facts – instead the writing is done to make the media outlet more money.
It is completely normal to feel worn out by the tumultuous investment environment we have all had to negotiate over the past 18 months.
Let’s strip back all of the complicated news that is being rolled out by the minute and go right back to basics. What makes an investment good?
Fundamentally, a good investment is something that has the potential for growth – either via its value increasing, the income it produces or a mix of the two. Investments are closely correlated with the business economic cycle – so therefore it is normal to experience boom and recession.
Good quality, real assets withstand recessions and they continue to grow and produce income into the future. Good investments are classified as good because they are robust and can withstand the hard times as well as prosper in the good times.
Globally diversified portfolios mean that investors are never overly concentrated in one area or industry. This also means that when certain economies are performing well, investors benefit.
Over the long-term, every segment of a portfolio should serve a purpose – some assets are there to provide growth, others are there to provide income – and a handful might be there as insurance.
It is easy to worry in times of uncertainty, especially when sources of, supposedly accurate, information are churning out fear-mongering articles with little to no repercussions for inaccuracy. If possible, it is best to take the stance that no matter the event over the long-term:
- Your portfolio will be positioned to benefit
- Recovery will come.
- Earnings will grow.
- Good investments will remain good investments.
If there is anything that you would like to discuss with your Adviser, please feel free to get in touch at your earliest convenience. Contact us on [email protected] or 0151 520 4353.
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