Believe it or not, it is 10 years since the collapse of Lehman Brothers precipitated the biggest global financial crisis since the Wall Street Crash. Yet have investors really learned anything from that debacle? Or was it an expensive lesson wasted?
Most retail investors still don’t understand what caused the financial crisis in 2008: according to Betterment, one of the largest wealth managers in the US, 79% of investors still can’t say what precipitated the Lehman Brothers crisis and many are uncertain as to how the S&P 500 index has performed since then.
What they are agreed on, however, is that the reputation of the financial industry has been badly damaged and has simply not recovered since then. While the average reported loss among Betterment’s clients was less than $5000, memories are long, and the crisis has certainly left its market on investing behaviour.
A quarter of individual investors in the US have stopped saving for their retirement, while two thirds admit they are putting less aside than they used to before Lehman Brothers. But those who were investing in 2008, and lost money, are actually more optimistic about things. Over 40% feel they have fully recovered since the financial crisis and nearly a quarter of these feel more risk tolerant than they were.
“People who were investing in 2008 felt the losses, but also witnessed the recovery,” explains Dan Egan, who works in the behavioural finance team at Betterment. “They know another dip is inevitable, but know that as long as they don’t get greedy or fearful, the rewards outweigh the costs.”
Which markets performed best after Lehman Brothers?
Fund manager Fidelity International has been doing some research of its own about what the best performing asset classes would have been had you invested immediately after Lehmans collapsed. US equities look like they were the place to be, with a 10 year cumulative return of 315.72%. Other interesting markets included high yield debt, which returned 205.91% over this period. Fidelity was also able to calculate that the best approach would have been to maintain a diversified portfolio, however, rather than focus on just one market.
Fidelity found that investors would have missed out on opportunities by sticking with just one asset class or market – US equities for example. Emerging markets performed well in 2009 and 2017, but they trailed several other markets in 2012 and weren’t even on the radar in 2013.
“The main conclusion is that diversification works,” says Tom Stevenson, investment director for personal investing at Fidelity International. “Trying to predict the best performing asset class year in, year out, is a fool’s errand. Indeed, over the last decade, no asset class has managed to hold onto its title of being the best performer over consecutive years, while the best performing asset has fallen out of the top five the following year on seven occasions.
A balanced portfolio, split between equities, bonds, real estate, commodities and cash can help smooth investment returns and lead to better long-term outcomes for disciplined investors. There has not been one year since 2008 that all the main asset classes have fallen together.
Cash is no longer king, however
What HAS suffered since 2008 has been the cash market, where interest rates were slashed by central banks and have only just started to climb again this year. If you had put £10,000 into a UK savings account in 2008 you would have made just £210. Contrast that with an index tracker focused on the FTSE All Share index, where you would have doubled your money.
With the benefit of hindsight, it is easy to see which were the sectors to be invested in after the crisis. Dividend yields were high in utilities, telecommunications services and energy, which actual capital gains were achieved in IT (+320.81%), consumer discretionary (+253.79%) and consumer staples (+179.36%).
“The sector rankings over the past 10 years show investors’ desire for high and sustainable growth during the long, sluggish recovery from the financial crisis,” explains Stevenson. “The quality style that favours growth over attractive valuations has been the out and out winner in recent years. The low interest rates that have been a consequence of the extended low growth environment have created a headwind for financials, which arguably caused the crisis in the first place and have been among the slowest to recover.”
But what of the future? The US equities market is still charging ahead dramatically, supported it seems by tax cuts. Investors are going to be trying to time the turnaround and are looking for indicators of the next big crash. Not everyone is convinced there will be another Lehmans-style meltdown.
“It’s doubtful you’ll see another Lehman-style spark to the next recession, but you will see it coming from another area of the market,” says James Penny, a senior investment manager with Greenfinch. “Speculation on the next spark seems to be circling around the swelling of assets currently within passive ETFs.“
Penny – and others like him in the wealth management sector – are advising investors to make sure their portfolios have defensive elements in them. Gold and some other commodities tend to hold value in a major financial crisis. We note that silver did particularly well in 2008-09 and would look to a long silver trade again should something similar happen. Other traditional defensive assets including utility stocks, pharmaceuticals, government bonds, and real assets like real estate.