Year in review Through the looking glass
February 2009
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:
| 21 January 2008 |
Global markets experience the biggest falls since 11 September 2001 terrorist attacks. |
| 17 March 2008 |
Bear Stearns is acquired by JP Morgan Chase for US$240m a far cry from its US$18bn capitalisation only one year earlier |
| 14 July 2008 |
US Mortgage lender Indy Mac collapses and fears that Fannie Mae and Freddie Mac are also on the verge of collapse forces the US financial authorities to intervene. |
| 15 September 2008 |
168 year old investment bank Lehman Brothers files for bankruptcy with losses of US$3.9bn accumulated just in the three months to August 2008 alone. |
| 17 September 2008 |
US Government announces a US$85bn loan to American Insurance Group to avert the collapse of the world's largest insurance company. |
| 22 September 2008 |
Australian Securities and Investments Commission (ASIC) bans short selling of all stocks on the Australian Stock Exchange for a period of 30 days (later extended). |
| 2 October 2008 |
US Senate approves a US$700bn rescue package but share markets continue to post further falls. |
| 10 October 2008 |
Australian share market posts biggest one day fall since October 1987 crash, down 8.3 per cent on the day and down 16 per cent for the week. |
| 11 October 2008 |
Australian Government announces it would provide an unlimited guarantee on all savings deposits for three years and would guarantee wholesale funding of financial institutions. |
| 15 October 2008 |
US share market posts its biggest one day fall since the October 1987 crash, down 7.8 per cent on the day. |
| 9 November 2008 |
China announces a four trillion yuan (A$871bn) economic stimulus package earmarked for low rent housing and infrastructure in rural areas including roads, railways and airports. |
| 20 November 2008 |
Australian All Ordinaries Index closes at 3,333 points down more than 50 per cent from its close one year earlier. |
| 24 November 2008 |
US Government injects US$20bn into Citigroup through preferred stock to avoid a collapse. |
| 25 November 2008 |
Federal Reserve announces that a further US$800bn will be allocated to a facility that will help market participants meet the credit needs of households and small businesses. |
| 2 December 2008 |
Australian Reserve Bank cuts official interest rates by a further one per cent. European and UK central banks also cut interest rates significantly. |
| 29 January 2009 |
US jobless claims hit all time high. |
| 3 February 2009 |
A$42bn Nation Building and jobs plan announced by Rudd Government. |
| 17 February 2009 |
US President Barack Obama signs US$789bn package to revive econom |
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.
You may have considered at various points during the current market downturn that you will move to a defensive strategy 'while markets are going down' and then switch back to a growth strategy when markets have stabilised. That would be nice if you could manage it, but how realistic is this really? Professional investment managers struggle to time markets in such a fashion, let alone the average punter. Michelle Heinrich, Head of Investment Communications at MLC detailed the tangible cost of chopping and changing an investment strategy. The US DALBAR study found in 2007 'over the 20 years to 2006 the market (specifically the S&P 500 Index) returned 11.8 per cent p.a., whilst the average US mutual fund investor managed a return of just 4.3 per cent p.a.'1
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.
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