These comments summarize our Special Report "The Aftermath of 2008: A Look at the Lasting Impact of the Credit Crisis." For the complete report, please visit our Research page.
The credit crisis of 2008 made a lasting impression on investors. Many saw their portfolios drop 20% to 50% at the time. While markets have recovered, the average investor has mistrusted the rally. It’s likely that most have not meaningfully participated in it. They seek permanent defense, so that they will never experience 2008 again. The volatility was too painful.
Given the challenging economic climate of our times (debt, deficits, low growth), defense should play an important role in most portfolios because it dampens near-term volatility. The problem, however, is that the investment tools for defense are very different from the tools for offense. Misapplication of these tools will likely create unintended consequences longer term. We believe the average investor is over-emphasizing defense.
By our analysis, defensive investments today (bonds, select dividend stocks, and other yield-generating investments) are in high demand and expensive, mispriced by fear, while offensive investments (global stocks in general) are often avoided in this “new era.” Too much emphasis on defense puts long-term portfolios at risk of not growing enough to support longer term objectives like living expenses, gifting, or large capital projects, or of actually losing value if inflation materializes.
We do believe we are entering a new era for economic policy, but we are not entering a new era for investing when it comes to two basic rules: 1) emotion always creates extremes and 2) the price for which you buy and sell an investment always matters. The ability to recognize extremes and act upon them with consistent discipline is the key to long term investment success.
“Why Not Wait for Some Clarity before Taking Calculated Risk?”
We hear this question a lot. It sounds good but doesn’t work in practice because investment prices already reflect most people’s future expectations. When there’s fear, defensive investments are in more demand (like we see today); when there’s optimism, investors seek more offense (as seen in the tech and real estate bubbles).
If investors wait for certainty, then defense will have ALREADY dropped in value and offense will have ALREADY moved up to reflect the improved outlook. The relative investment opportunity would have largely passed.
As our website will discuss in detail, we build portfolios that seek to reflect your near-term and long-term goals by balancing the right mix of defensive (“preservation”) and offensive (“appreciation”) tools. In addition, we use tools that respond in different ways to different economic environments, such as inflation, deflation, and stable pricing. When those tools are at an extreme, we must make adjustments, while keeping the right mix of preservation and appreciation in balance.
NOTE: For the complete report, which includes 15 detailed charts and comprehensive analysis, visit our White Papers at www.cornercap.com.