Investing

For many investors searching for answers in investment markets, it is tempting to chase new products or innovative strategies. The experience of the past few years, however, suggests this can be self-defeating.

British-based Create-Research asked more than 500 global pension funds and investment managers whether investment innovations had worked during the financial crisis. The conclusions were deflating and should ring a warning bell for ordinary investors relying solely on the expertise of the professionals to add value.

No time for gimmicks

This was no superficial quickie survey – it had the backing of global groups such as Principal Global Investors and Citi Securities, and the Financial Times. It found that innovations in investment products generally had fared poorly and their impact was overwhelmed by the impact of the financial crisis.

For investors looking for answers, it seemed some newer investment areas – emerging market shares and bonds and high-yield bonds – provided the most value, along with exchange traded funds; the least useful products were those which were supposed to benefit from volatility or those which simply added leverage or different risks.

The lessons seem fairly simple: as investors we should look for areas offering better growth and higher returns or, in the case of ETFs, lower costs. But we should avoid financial products carrying high risk warnings, which are complex or hard to understand or which don’t improve on existing products.

Indeed, it turns out that those old investment adages – to seek growth areas and avoid investing in things we don’t understand – were right all along. The cynics among us can continue to maintain their belief that many investment innovations are simply the professionals finding new ways to show us how clever they are in launching products on which they can charge more fees.

Realism not cynicism

Cynicism can be taken too far, however; we amateurs need to take some notice of the professionals. We often need their help to tap into more complex or distant markets such as absolute returns or emerging equities. This has become more obvious and pressing after the financial crisis, as most of us realise the boom results of past decades have been replaced by uncertainty and lower investment returns.

This doesn’t mean giving up on investing but it does mean avoiding a lot of the short-term noise in the stockmarket. Nor does it mean we should chase the next new gimmick or think that only the investment professionals can help us.

Three key factors

Instead a cool head, some experience and the luck of being in the right place can still work for amateur investors. Let’s look at those three factors:

■ By now investors who switched part of their funds from equities to fixed interest before 2008 are still doing better than those who hung on and hoped equities would regain their previous peaks. Those people who kept a cool head now have the necessary liquidity to re-enter the sharemarket when stocks are screaming out “buy me”.

■ Those investors who have experienced past market roller-coaster rides know they sometimes have to be patient – and then be brave enough to buy when everyone is yelling “sell”, as in early 2009.

■ Finally, the near-miss in late 2008 after Lehman Brothers fell means that many people are aware – perhaps too aware – of the dangers of another really big financial market panic. Recently, it has been Greece; next it could be the US, though the threat of downgrading of its AAA rating could yet bring it to its senses.

But investors in Australia need to remember that we came through the last big crisis better than most, due to our sound economic position. That continues – subject to China and a firmer currency.

In the meantime, we have some of the best-placed natural resources stocks and some of the soundest and highest dividend-yielding bank stocks in the world. Many investors outside Australia might sacrifice their first-born to be in the same position as us.

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