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What have investors learnt from the financial crisis?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

The financial crisis was marked by a series of historic events a decade ago, including the run on Northern Rock. We consider what investors may have learnt from the aftermath.

Click to toggle accordion What you'll learn:

How the financial crisis impacted the market.

Why diversifying your investments can help.

How investing regularly may help smooth out market volatility.

It is 10 years since anxious savers formed queues around the block outside branches of Northern Rock, after the bank received emergency funding from the Bank of England.

The scenes that followed the bail-out of Northern Rock on 14 September 2007, the first run on a UK bank in 150 years, were hugely significant in that they represented the point at which the unfolding financial crisis began to have a real impact on British consumers.

In the following months, struggling investment bank Bear Stearns was bought out by competitor JP Morgan; Fannie Mae and Freddie Mac, which had guaranteed thousands of sub-prime mortgages in the United States, were bailed out by the government there. And then, almost a year to the day after the run on Northern Rock, on 15 September 2008, Lehman Brothers, another investment bank, filed for bankruptcy.

On 24 October 2008, the deepening financial crisis caused many of the world’s stock markets to experience the worst declines in their history on ‘Bloody Friday’, with drops of around 10% in most indices.1 In the months that followed, central banks slashed interest rates in a bid to stave off a global recession, but stock markets continued to be volatile. The FTSE 100 index of Britain’s largest companies closed at a six-year low six months later, in March 2009.2

Yet, since then, the FTSE 100 index has recovered, with investors enjoying a bull run buoyed by monetary stimulus, both in the form of record low interest rates and quantitative easing. The index has climbed to record highs this year, producing gains for those who held their nerve and remained invested in the decade following the financial crisis.3

Here, we examine what lessons the financial crisis can teach investors about protecting themselves from market volatility.

Remember, the past performance of investments is not a reliable indicator of future performance, and no-one can accurately predict which way the FTSE 100 index, or indeed any other index, will move next. With all investments, there is a risk that you could get back less than you put in.

Focus on the long-term

The stock market recovery since the financial crisis is an example of one case where focusing on long-term investment goals, and avoiding knee-jerk reactions in response to the impact of any event, whether political or economic, worked well.

Maintaining a long-term view of at least five years, but preferably longer may also help you resist the temptation to attempt to time the market. Typically, the longer you are prepared to stay invested in the stock market, the greater the chance of your investments producing positive returns. Selling your investments when markets take a downturn means you are turning paper losses into realised ones. However, it’s important to remember, while this is what’s happened in the past, the past performance of investments isn’t a reliable indicator of how they will perform in the future. The value of all investments can fall as well as rise, and if they fall, there’s no guarantee they’ll ever recover in price. If you’re unsure when or where to invest, seek professional financial advice.

Spread your investments

Holding a spread of different assets such as equities, bonds, property and cash can help reduce the impact economic or political shocks have on your portfolio.

That’s because different types of asset tend to move in different directions depending on the economic and inflationary pressures at the time.

For example, shares tend to perform well during period of economic growth, as output typically increases, increasing profitability for many companies and enabling them to pay shareholders higher dividends. During times when economic growth is weak, however, government and corporate bonds typically fare well, as investors search for safer assets and a regular income stream.

Alternative assets, such as commodities can provide an additional layer of diversification. For example, gold is often perceived as a ‘safe haven’ during periods of stock market volatility. When it was announced that the UK had voted to leave the EU in June 2016, the price of the yellow metal enjoyed its biggest jump since 2008 amid a climate of uncertainty. Bear in mind that commodities can be particularly volatile, so investors need a strong appetite for risk. However, gold differs from other commodities such as copper, steel and corn, in that it doesn’t have any particular economic utility. It is simply seen as potentially offering a long-term store of wealth.

Investors can further diversify their portfolios by investing across a range of geographical areas. Holding a wide international mix of assets in your portfolio can help ensure you aren’t caught out by short-term setbacks in any one region or country.

Ensuring your portfolio is diversified doesn’t mean you get rid of all risk, but it can potentially help prevent you losing significant amounts of your savings if a markets suddenly falls, compared to investing in a single asset in a single region.

Invest regularly

It is, of course, almost impossible to time the market. Those who sold their investments at the top of the market in 2007 and bought back at the low of spring 2009 may have done so more out of luck than judgement.

No-one can accurately predict when the stock market might fall, although there is typically plenty of speculation about when this might happen. Therefore, drip feeding your money gradually into the stock market means you avoid the risk of investing a big lump sum just before a market fall but also means that you don’t get the full benefit if the market rises.

Investing regularly enables you to buy shares or units in a fund at different prices, buying fewer when the market is up and more when it is down. Regular investors may have benefitted during financial crisis by buying cheap shares in the depths of the downturn.

This approach can help smooth out market volatility. However, there are no guarantees that this approach will leave you better off. You could face a loss if, for example, the price of a share is volatile, and you buy when it is at a higher price – meaning you buy fewer shares per pound you invest.

The value of your investments can fall as well as rise and you could get back less than you invest. Barclays Smart Investor doesn’t offer personal advice. If you’re not sure about investing, seek independent advice.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

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