Surviving the Recession

Surviving the Recession

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The Global Recession started in 2007 and went well into 2008 before reaching its nadir. At that time there was widespread debate about whether this would extend into a depression or mellow into a recession.

The Great Recession was a suitable compromise for the economic conditions that unfolded. These conditions were reflected in markets that followed the conventional market crash pattern of previous bear markets.

We probably all remember that period of market recovery during which ‘green shoots’ were so often mentioned that pandas salivated at the prospect. The green shoots wilted slightly as the discussion turned to whether this would be a U shaped, V shaped, W shaped or no recovery at all.

The South African bear markets chart is interesting to review. It sets out the paths of the last five market corrections from start to recovery. What’s interesting to see is how prolonged the current correction has been. It’s almost the longest on record (excluding the market correction during the Great Depression), and this is definitely contributing to the investment fatigue facing many investors.

There remains an ongoing concern about the sustainability of the recovery post 2008, what it will look like going forward, and how this will be reflected in the investment markets.

A fragile recovery

The number of new events crashing across our investment shores have been immense: nuclear disasters in Japan, banking implosions kicked off by Lehman’s, more recently we have heard that most of the international interest rate determinations were ‘low balled’ to ensure that their pricing by the respective banks did not reflect their actual weak credit positions, and now some premier banks are to be hauled over the coals for laundering money of various high profile terrorist organisations.

 

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And if that was not all, the political parties of various countries have also teased the already fragile mind-set of investors. We have had the US Congress staring down a fiscal cliff, Italy electing an administrative premier,

Greece maintaining its time honoured traditions of weak coalition governments that are unable to implement any meaningful change as they simply don’t have the public support, France’s government swinging towards greater Socialism, the bristling German shore on which all the European countries’ jetsam is being washed up, and all throughout Switzerland remains that bastion of independence with a currency so strong that it’s damaging the Swiss economy!

The most striking difference on either side of the Atlantic is the US being swift to grasp the nettle, whereas in Europe kicking the can down the road is a well-honed art form.

All through this time South Africans have had declining interest rates, an economy that is getting tighter by the day, and the upheavals caused by the majority political party preparing itself to elect its new (or old) leader.

Where to now?

The current thinking influencing investors is how to invest given the fragile state of the world economy. In particular, investors who are retired are at the sharp end of declining interest rates and hard pressed to secure sufficient income without taking excessive risks.

All too often in these times investors turn to Ponzi schemes in the vain hope that they can chase a ‘sure bet’. Inevitably these sure bets all have the same outcome – a sure loss.

It’s thus of vital importance that investors carefully consider their investments. Attention should be paid to whether the investor is genuinely capable of tactical asset allocation, which is a key ingredient in ensuring effective returns.

In all too many instances investors are not equipped to make investment decisions and therefore act mostly on unresearched hunches. This results in poor performance because they chase returns, investing after the fact and then redeeming when their investment gets close to the bottom as they lose all desire to hold the investment through the investment cycle.

For that reason it’s worthwhile for investors to assess which fund management houses they wish to partner with. In the current uneasy markets it’s worthwhile paying a fund manager to make the crucial asset allocation decisions for you.

Once that decision is made the manager’s role is to then select the very best securities in the asset classes and manage those securities through the full economic cycle. These skills are a non-negotiable of successful long-term investing and investors are well served by paying for them.