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Intelligent investor: Lessons for the next crisis

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Stephen Humphreys

With the last global financial crisis now 10 years ago, it’s important not to forget the lessons of those turbulent times and the importance of continuing to follow sound investment principles – even when stock markets are tumbling. Above all, having an investment approach you can stick with – especially during tough times – may better prepare you for the next crisis and its aftermath.

A decade ago, in February 2008, Northern Rock was nationalised by the then Labour Government, while the collapse of Lehman Brothers still lay ahead – an unexpected drama that would unfold in September 2008. In the course of 2008, the stock market dropped in value by almost half.

Since then, stock markets have rebounded and we’ve even enjoyed years of double-digit growth. However, in the midst of the global financial crisis, many investors – quite understandably – reacted emotionally and, in the heat of the moment, sold their stocks. Many, but not all. Those investors that held their nerve and stood by their established investment approach benefited from the subsequent market rebound.

The crisis of 2007-2008 was far from unique, of course. Periods of substantial market volatility have occurred before – and markets have recovered before. For example, October 1987 saw another stock market crash followed by recovery. Based on an example balanced investment portfolio (60% equities and 40% fixed interest, investors would have benefited from cumulative returns of 15% after one year, 69% after five years and 198% after 10 years.

This example emphasises the importance of developing a long-term investment perspective and achieving appropriate diversification, alongside an asset allocation that aligns with individual risk tolerances and goals. An investor with such a portfolio should be better able to hold their nerve and remain disciplined during periods of turbulence, particularly with the support of their trusted financial adviser.

History suggests there will be another crash at some point. Some individuals are particularly prone to anticipating the next big market drop – but rarely get the timing right. Predicting future events correctly, or how the market will react to future events, is a difficult exercise. Second-guessing the market is a fool’s game.

To enjoy the benefit of higher potential returns, investors must be willing to accept increased uncertainty. A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A well thought out and transparent investment approach can help you face uncertainty, remain disciplined and ultimately capture the long-term returns offered by capital markets. Moore Stephens Intelligent Investment philosophy does exactly this.

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