Investment markets

Year in review – Through the looking glass

The Global Financial Crisis (or GFC as it is now becoming known) is well over 12 months old. But the reverberations are still being clearly felt.

Superannuation returns are – as expected – fairly dismal in absolute terms.

To put it bluntly – everyone is suffering. The current crisis is now acknowledged to be the most serious since the Great Depression of the 1930s.

Looking at the extraordinary events of the past year, one could almost be mistaken for thinking it is a running sheet for Alice in Wonderland's Mad-Hatter tea party.

Who amongst us would have thought even a year ago that the largest bank and largest insurer in the world (Citigroup and American Insurance Group) would be in danger of collapse, that a number of UK banks would be partially nationalised, or that words such as 'Depression' would be spoken aloud, much less seriously debated.

It's not just the events themselves, but the speed with which they have transpired that has shocked markets and investors. It's indeed a bit like Alice in Wonderland who has gone through the looking-glass… and sees what a strange world it is.

Let's recap some of the major events that have occurred during this crisis:

Reading through the above timeline gives you some sense of the historic nature of what has occurred. Extraordinary circumstances have demanded extraordinary responses. This is a period of history which will no doubt be dissected again and again. How did it happen? Why did it happen? And what should world governments have done about it?

We'll leave these questions for people to address once investment markets eventually, inevitably, settle down.

But the more burning question for many of us right now is – 'what should I do with my superannuation?'

The answer could well be 'nothing at all'. The investment strategy you selected prior to this financial crisis may still be the right strategy for you unless your personal circumstances or objectives have changed.

For most people, retirement is some way off. Even for those approaching retirement or who are already in retirement, it's important to remember that your investment horizon is long term.

Conventional wisdom seems to be that you should be moving to defensive assets at retirement. It's sensible to question the strength of that logic. Are you suddenly going to spend your entire super in the first year that you retire? Almost certainly not.

In reality, most people need their super to last 20 years or more in retirement. That is a long time horizon.

Moving to a defensive strategy such as cash during these uncertain times may seem tempting but could well be counterproductive, as defensive assets can generally be expected to under perform growth assets over the longer term.

A defensive strategy will give some short term protection from volatility, but may provide you with less money in retirement.

Ask 10 people if they think they are a better than the average car driver and I daresay you'll have close to 10 responses to the affirmative. The same can be applied to investing in markets. Many people think that they can pick the top or bottom of the market. Somehow they will just 'know' when the time is right.

The reality is that when markets rebound, they can do so very quickly. By the time your 'gut' is telling you the worst is over, it could well be that you've missed out on the first 20 per cent or 30 per cent of gains.

Recently times have been tough. Global financial markets are baring the resemblance of a 'Mad-Hatter's tea party' more than an international financial system. However, the historical nature of the financial markets only indicates that crisis's end, and markets eventually recover. Regarding your superannuation, while we recommend reviewing your investment strategy to ensure it is still appropriate for you, if your personal circumstances and objectives haven't changed since the market downturn, you may not need to change your investment strategy.

¹ MLC Keynotes magazine, November 2008.