The World And Its Markets Have Changed; The Crisis Of 2008 Showed That Investment Strategies From Over 20 Years Ago Are Not As Effective

Thursday, August 23, 2012 07:19
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The World And Its Markets Have Changed; The Crisis Of 2008 Showed That Investment Strategies From Over 20 Years Ago Are Not As Effective

Tags: client education | investment strategies | investor behavior

Financial advisors have traditionally been trained to focus on the US as a source of investment. But there are many opportunities abroad. Traditional investment strategies from over two decades ago seem to have lost their effectiveness. This was poignantly evident during the crisis of 2008.

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Since the crisis, debt problems in both Europe and the US have worsened. Fiscal policy in both economies seems to be headed in the wrong direction.
 
Some analysts say this makes emerging economies much more attractive. The economies of Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa are represented by the S&P CIVETS 60 Index. Since 2007, the index has returned around 11.5% compared to a loss of 12% for the S&P 500.
 
The index represents countries with bountiful natural resources, strong infrastructures, market liquidity, and low correlation to the debt problems of either Europe or the US.
 
It offers investors a way to invest in the entire emerging economy instead of individual economies that may be more vulnerable to geopolitical or other factors.
 
In the current environment, it seems developed countries like Greece, Italy, and Spain—and even the US—hold greater risk. Until these economies take definitive action to address their fiscal problems, analysts say emerging markets should continue to outperform.
 
The wealthiest investors look for such opportunities. Of course, they have what might be referred to as fallback funds if their alternative investments blow up. But wealthier investors also tend to concentrate most of their assets into either a single or narrowly grouped strategy.
 
This shows that they need your advice to create more balance and to be more mindful of their liquidity needs. They experienced more of a liquidity crunch during the 2008 crisis because they had overinvested in illiquid alternatives with long time horizons. Many of the wealthy had to adjust their lifestyles as a result.
 
On the other hand, investors looking solely to the US for their returns have the opposite problem. They may be too conservative, diminishing their opportunity for returns in a low interest rate environment.
 
Each of these investor sectors felt an uncomfortable squeeze during the crisis. It’s not clear if the effects of the crisis will go away any time soon. But there’s always the opportunity for you to guide your clients toward balanced investment choices specifically designed to help them achieve their goals by monitoring economic and market conditions and positioning them well accordingly.

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