People forget. Or tend to have very short memories. But if there’s one event that seems to be burned into our consciousness, it’s the financial crisis. Now 10 years on, it continues to cast a long shadow.
Pinpointing a single event or date as marking the start of the global financial crisis is difficult, if not impossible. Some single out August 2007 when BNP Paribas froze three of its funds because it was unable to value the complex mortgage-backed securities they held. Others point to the run on Northern Rock in September of the same year, or the collapse of Lehman Brothers a year later as key markers of this seismic event.
What followed – the freezing up of the financial system, recession, the slashing of interest rates to zero, the launch of massive bond-buying programmes under the banner of quantitative easing (QE) – now belongs to the history books. Yet, a decade on and the “emergency measures” that followed in the wake of the crisis are still in place. QE is still surgery for the global economy and interest rates remain at record lows. Abundant liquidity might have boosted asset prices, but economic growth remains elusive, not to mention the many unintended consequences of priming the economic pumps in this way.
A decade down the line, everything’s changed and a lot has stayed the same. In this post-crisis world, what are the key lessons when it comes to your personal finances?
Cash: a sinking ship
The lower for longer interest rate environment that we live in today is arguably the most visible and obvious consequence of the financial crisis.
Record low interest rates have been good news for borrowers – those with mortgages and credit card debt. But for those who have been prudent with their money – i.e. savers and investors, this environment has hurt.
Analysis from Fidelity International show that had you started investing in the FTSE All Share on 31 July 2007 and adopted a disciplined strategy of regularly putting in £5,000 each year on the same date until now, then you would have seen your original investment of £50,000 grow to £81,015 over the past decade.
If however, you had sheltered all your savings in cash over the past ten years, saving £5,000 each year into the average UK savings account, your savings would have only grown by a paltry 1.2 per cent to £50,619 – that’s a difference of £30,396. Since then, 10 years of record low rates has turned cash from a perceived “safe haven” into a sinking ship. Those who held their nerve and sensibly drip fed savings into the market would have seen their investments grow significantly – and that’s despite the dramatic stock market crash in late 2008, the subsequent Eurozone sovereign debt crisis and various political risk events over the past ten years.
Lower wages, higher self-employment
Wages plunged in the heat of the credit crunch and while recovering from these dramatic falls, our earnings have largely flat lined since the financial crisis. Weak wage growth has been a key feature of the post-financial crisis world.
This could be down to automation, more people working part-time and the growing cohort of self-employed people with limited earning power, such as Uber and Deliveroo drivers in the so-called gig economy.
Now 10 years on from the credit crunch, a changing economy alongside digital advances have brought with it new ways of working with self-employment, freelancing and contract working becoming more common.
If you belong to one of these groups, the lesson is not to ignore retirement. A self-invested personal pension or SIPP for short, can step into the pensions void left by leaving formal employment and foregoing a workplace pension.
Eggs and baskets
From late 2007 to early 2009, contagion was a preoccupation, meaning that even those sticking steadfastly to golden rules such as maintaining a diversified portfolio, investing for the long term and keeping some cash in reserve for market dips will have seen paper losses.
That said, regular savers would have benefited ultimately from buying cheap fund units or shares in the depths of the downturn in world markets. Investing the same amount each month means buying the most when others are most fearful.
Asset allocation remains the biggest contributor to returns over the long term, but can be difficult to perfect, not least during bouts of volatility when leadership can rotate quickly from one sector or market to another. A good way to spread the risk associated with specific markets or sectors is by investing into different investment buckets to reduce the likelihood of concentrated losses.
Eight years into the bull market as investors become increasingly nervous about the stock market’s apparently endless upward path, arguably the most important lesson is that golden rules outlive financial crises.