News
Investing in the age of the “New Normal”
Posted: 03 November 2009
As the dust clears from the Global Financial Crisis (GFC) investment managers are now formulating investment strategies that will be applicable in this new environment. One person who has given a lot of thought to this question is Bill Gross, founder, Managing Director and co-CIO of Pacific Investment Management Company (PIMCO). PIMCO were founded in 1971 and now run the largest bond fund in the world. As at June 2009 PIMCO had some US$840 billion in Assets under Management.
Bill Gross coined the term the “New Normal” to describe the outlook for the investment environment. After decades of expecting continuing high returns and excessive consumption, which was fuelled by a mountain of cheap and easily available credit, the worm has turned. In Bill’s opinion the “New Normal” is going to be dominated by the forces of: deleveraging, de-globalisation and re-regulation.
This is going to mean lower returns as growth more closely replicates Gross Domestic Product (GDP) rather than significantly exceeding it year after year. This translates into asset returns of 5%-6% rather than the 9%-10% that was expected in the past. The re-regulation of financial markets will also mean that policy makers will have a much greater say in where and how funds are invested and how much return will be available for distribution and to whom.
All of this talk about lower returns is very concerning, particularly for the section of the population that fall into the category of “Baby Boomers”. This group has experienced the period of excessive consumption and are now facing the reality of 25-30 years of retirement in an environment of low investment returns.
How do you adjust to this new environment? The traditional approach of going through five simple steps is still valid:
- Indentify you goals
- Assess your current position
- Determine your attitude to risk
- Plan your investment strategy
- Review your situation at least annually.
However, the experience from the GFC has taught us that we need to pay far more attention to risk aspect of investing. An unfortunately large number of investors have learned that an AAA rating by itself doesn’t guarantee no risk and high risk doesn’t always equate to high returns. Sometimes high risk just means high risk. Moving into a lower return environment also means that it is much more difficult to make up any losses and preservation of capital becomes a primary consideration. The old adage, the return of capital is more important than the return on capital, is very relevant in a low return environment.
In this new environment investors are going to have to ask themselves the following questions:
- How much risk is associated with the level of return that I require?
- What is my risk capacity, i.e. can I accept the risk required to achieve my goal or do I need to modify my goal?
- Is my perception of the risk accurate, i.e. am I making a decision based on limited information?
- What is my risk tolerance?
Successful investing in the age of the “New Normal” is achievable but to avoid the pitfalls a disciplined process is required and talking to an independent, qualified and experienced adviser can help enormously.
A copy of our Disclosure Statement is available free of charge at www.staplesrodway.com or by phoning 0508 22 00 22 or (09) 309 0491.
