Lessons to be learned

 As the index of leading UK companies continues to struggle to gain any traction, the latest economic data on the UK economy, in the form of monthly GDP, reported that the economy continues to grow. In fact, there was a larger than expected rise in the monthly data. The service sector, which constitutes the bulk of the UK economy helped push the headline three-month rolling rate to 0.6%, according to Capital Economics. Sterling also had a modest rise as Barnier expressed the view that a deal could be struck in the next six to eight weeks. What kind of deal is probably less clear.

As an aside sterling has been a declining currency for many years, particularly against the US dollar. There was a time one could get four dollars to the pound, you now barely get one. The pound has consistently lost ground to the euro since its inception. The attempt to keep the pound pegged to the Deutsche mark is finally what sent us out of the exchange rate mechanism.  One question an investor always must consider is currency exposure. Should one just conclude the pound is a currency that will remain in structural decline?

The legacy of 2008 remains as newspaper articles relive the moment 10 years ago when Lehman was allowed to fall under a bus. The event is almost talked in terms of Kennedy’s assassination, the death of Princess Diana, and Apollo 11 as one of those, where were you moments. The debate continues whether it should have been allowed to happen by the regulators and what the lessons have been learned all these years later.

The question then moves on to how an investor protects oneself from the next such event? What lessons can an individual learn  from 2008? Part of the answer lies in not having to be a seller at these times, we believe. The real pain is felt having to liquidate in periods of stress. The Sunday Times has a lead article, “The next financial crisis”. Later in the paper a balanced view of how one should view the next financial crisis and reveals and a few interesting statistics. Shares have beaten cash deposits over 75% of periods of five consecutive years since 1899. The historical probability of shares delivering higher returns than deposits increases to 91% when holding periods extends to 10 years. Tom Stevenson, investment director at Fidelity is quoted. “Even if you are incredibly unlucky and invested on September 12th, the last trading day before Lehman went bust it would have taken approximately one year to be back in the same position you were in”. The other point the article goes onto remind everyone is diversification. So often savers seem to be property or shares, few are both.

The lessons are the same, don’t be a seller at the wrong point, diversify,  think for the long term, don’t be swayed by newspaper headlines and remember crisis brings opportunity.

Posted on September 11, 2018 .