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Last week was the 10th anniversary of the collapse of Lehmans Brothers bank so we take a look at what lessons may have been learned by private investors since…


Ten years ago  (15th September 2008 to be exact) Wall Street bank Lehman Brothers filed for bankruptcy protection sending shockwaves around the world. In the UK the queues around the block to withdraw funds from Northern Rock a year earlier had already signalled the beginning of the credit crisis.  What followed was unprecedented – the only comparable event being the great depression of the 1930’s.

In this piece, we reflect on how we supported clients throughout that difficult period and how we continue to help them prepare for the unexpected.  We also share the thoughts of our independent economist, Peter Stanyer on what lessons may have been learned by private investors since then.

Reflections on 2008 – Riding the Storm

Partner at FPC, Moira O’Shaughnessy recalls:

The pace of the crisis was what I remember most clearly, with every day bringing more bad news as the knock on effect of bank lending drying up and credit evaporating forced distressed sales of assets and sent markets into a spiral.  We focussed our efforts on communication – emails and calls to clients daily helping to translate the often mixed messages that were coming from the media.  All clients held firm and thanks to having been encouraged to hold strong cash reserves, they rode the storm. Other than temporarily ceasing regular withdrawals for a number of clients, we allowed diversification to do its thing and portfolios recovered.  Then as now, we had avoided complex, hedged or leveraged products within clients’ holdings so we knew what was under the bonnet. 

Our clients’ biggest concern in 2008 was about the safety of their cash and despite the subsequent introduction of greater protections, that trust and faith in the banks has never fully been restored. Today, the banks are in a better condition (check out the Bank of England’s Factsheet) but just last week Mark Carney warned of a rise in household debt.  We are concerned that against the backdrop of continuing low interest rates, many individuals and businesses are taking on debt they may be able to temporarily service but will ultimately need to repay. The next crisis may well emerge when that comes home to roost.

What have private investors learnt since the crisis? 

Independent Economic consultant, Peter Stanyer shares his thoughts:

1. Keep it Simple

The global crisis left many modern ideas of investment diversification using combinations of ‘alternative’ investments looking woefully inadequate.   But plenty of other long term investors had never departed from the ‘keep-it-simple’ combinations of government bonds and well diversified equities for their financial investments. Many financial advisers, like FPC (and some of the largest institutional investors) served their clients well by adhering to this simple approach. That was the defining difference in 2008 between a keep-it-simple old fashioned investment strategy and a more sophisticated strategy, which may have left its investors feeling confused, let down and possibly angry.

2.  Low Interest Rates – The New Normal?

For the first five years or so after 2008, the view among most analysts was that ultra low interest rates were the result of temporary crisis measures and that interest rates would soon return to more normal levels. But they have not and 2% to 4% interest rates may be the new normal, with the higher end of this range likely to be seen as a cyclical high. Against this background, investors have become more comfortable paying more for shares and property but they remain volatile assets and are capable of large declines in value.

3.  Trying to time markets is unreliable and can be very costly

This issue is more relevant than ever in the aftermath of the prolonged period of declining interest rates and unrepeatable performance by government bonds. Those investors who sought to reduce the risk of capital loss by selling equities and bonds missed out on the substantial revaluation of investments illustrating that the best plan is often to maintain a stable long term strategy. However, if an investor’s circumstances change this should encourage them to check with their adviser to ensure that their agreed strategy is still appropriate.

4.  Memories are short: bad times

We all need to remind ourselves that we quickly adjust to the world as it is, paying lip service to the increasingly distant crisis.  Advisers and investors should therefore initiate discussions about how an investment strategy might perform in bad times. And if an investment product seems to offer a better prospect than the market always ask, how and why? Better than market performance could reflect rare skill but more likely it could rely on exploiting a market anomaly or be a reward for higher risk-taking, which may unravel in bad times.

5. Memories are short: investor fraud is a “hardy perennial”

The financial crisis provided unwelcome reminders that investment fraud is an ever present danger.  The collapse of Madoff Securities in December 2008, revealed his funds, which had a supposed value of $65 billion, to be the world’s largest ever Ponzi scheme.  Ironically, its collapse was precipitated when its presumably then satisfied investors needed to withdraw cash to offset losses elsewhere. Madoff  was far from being the only major investment fraud to be unearthed by the crisis.  It was a widespread phenomenon and it seemed for a time that almost every private investor knew someone, who knew someone (who knew someone) who had been a victim.  We cannot hope to abolish fraud, but we can remind ourselves of the recurring lessons of history. Unless we are vigilant, any of us could fall victim.

Our Advice remains – Stay the Course

Partner at FPC, Mark Ralphs comments:
“We genuinely believe in ‘winning by not losing’ and we have always actively avoided fads and manufactured products. The result is that no matter what the crisis or noise in the news and markets, no client has ever been a forced seller of an investment at a depressed price.  Nor have any of our panel funds failed.

By separating ‘Savings’ from ‘Investments’, our clients can ensure that when (not if) there are bad days, they can call upon their cash savings in the short term.  Hence the importance of bank security.  FPC’s clients’ investment success is based around the fact that their portfolios are broadly diversified and are designed to meet their individual time horizons, risk profile and objectives. They are also realistic and are guided by probabilities rather than possibilities. 

The credit crisis taught us to hold firm to those  beliefs and our investment philosophy remains unchanged – stay the course and focus on controlling what we can  – risks, tax and costs.” 

As always if you have any questions or concerns or would like more information about our investment approach do get in touch.

Peter Stanyer is co-author with Professor Stephen Satchell of The Economist Guide to Investment Strategy, 4th edition, Profile Books, 2018. The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment