1. Diversification continues to work
2008 was a difficult year for growth assets such as property and equities (both domestic and global). It was however, a great year for government bonds, cash & managed futures. Before you allocate 100% of your portfolio to cash, it is prudent to remember that it has only outperformed all other asset classes once in the past 29 years.
2. Rebalancing does reduce your risk
Rebalancing from your positively performing assets and re-allocating to property and equities will pay dividends in the mid to long term. This worked at the beginning of 2008 if you sold down some of your equity and property exposure and topped up your previously underperforming bond and cash holdings.
3. Ensure that your portfolio can profit from falling markets
An allocation to long/short or managed future investments have the ability to make money in rising, falling and flat markets. A small allocation to these strategies can help you diversify your portfolio beyond the standard investment opportunities and can add to your returns.
4. If it’s too good to be true, it’s too good to be true
Mortgage funds offering yields significantly higher than cash were marketed as being secure. Generally, the higher the return, the higher the risk. As time has shown, these investments had significantly higher risk and the return being offered did not adequately compensate you for this.
5. Leveraging through the wrong structure penalises you on the way down
Borrowing money to invest can significantly increase your returns. It can also wipe you out. Conservatively structured, unlisted warrants have been amongst the best performing geared investment as interest rates have dropped below dividend yields. Bond and call structures have also performed well on a relative basis.
6. Cash was king
Retaining a portion of your portfolio in cash, (NW Advice advocates at least 3 years living expenses if you are retired), allows you to sit out gyrations in share markets and potentially avoids selling down your investments at the bottom of an investment cycle. It also avoids the reliance on investments which had liquidity issues in 2008. It also provides capacity to participate in capital raisings which can yield significant short term profits.
7. Don’t fall in love with your investments
It is important to constantly assess the merits of every investment within your portfolio. 2008 is littered with corporate failures which were share market darlings: Babcock & Brown, Centro, Zinifex et al. By crystallising the great gains that these investments once offered, you can re-allocate your capital to better opportunities.
8. Continue to be an individual
Avoid your natural ‘herd’ instincts. Focus on fundamentals and eliminate emotion when investing. Very few picked the top of the share market and even fewer will predict the bottom. Waiting for the market to bounce before you feel comfortable will satisfy your herding instincts but will reduce your returns over the long run.