What have we learnt from the GFC?

It’s now 10 years since the Global Financial Crisis spread panic and devastation through investment markets. What lessons can we learn from this regrettable event?

The Global Financial Crisis (GFC) triggered one of the deepest recessions amongst the world’s advanced economies since the Great Depression of the 1930s. While the events that triggered it may have been complex, there are some simple lessons we all can take from it as individual investors to help minimise the impact of such a financial disaster in future.

What triggered the GFC?

The GFC refers to a period of extreme financial market stress between mid-2007 and early 2009. Most super investments, including ESSSuper member accounts, experienced large negative returns in the months following the collapse of US investment bank Lehman Brothers in September 2008.

In retrospect, there were signs of instability in the financial system for some time. However, most of the investment community did not predict the financial crisis until it was too late.

The root cause of the crisis stemmed from too much debt in the banking and financial systems. The US Government promoted home ownership among lower income people by sponsoring mortgages with very low introductory interest rates to households that had poor credit histories.

The banks employed complex financial engineering to sell these ‘low quality’ mortgages to professional and amateur investors. The mortgages were sold in supposedly ‘low risk’ bundles that were marketed as ‘higher quality’ than the actual sum of their parts. Even international credit rating agencies were unaware of the real risk of the underlying mortgages.

The inevitable aftermath

When the introductory interest rates on these mortgages ended and borrowers were faced with increased repayments, many mortgagees in the US defaulted. The rising number of defaults led to house repossessions. There were so many forced sales that it led to a collapse in house prices.

As a result, the banks suddenly found their balance sheets filled with loans that were larger than the value of the houses they were repossessing. The scale of the problem led banks to stop lending to each other, which led to the collapse of Lehman Brothers, and the wave of selling then impacted share markets.

Lesson #1 – don’t invest in something you don’t understand

The GFC was made worse by complex financial engineering which neither investors nor credit risk agencies fully understood. ESSSuper’s focus is to help members retire with dignity, and we put a lot of resources into providing information to empower you to make informed decisions about your super investments. If you don’t understand what your super is invested in, please talk to our Member Education team. Their job is to help you, so you can feel confident enough to ask questions and continue to ask questions if there is something you don’t understand.

Lesson #2 – invest over the long term

Switching between Investment Options when markets are falling can make matters worse. The GFC was a short and very sharp correction.

GFC_Image

The chart below shows the impact of remaining invested in the Growth Option versus switching to the low risk Cash Option.

The chart shows that investment markets recovered and over time members were better off participating in that recovery.

Lesson #3 – plan ahead for retirement

Investing for the long term is more complicated for members looking to retire and make a large withdrawal from their super in the next three to five years. A large withdrawal at the wrong time can mean you miss out on any subsequent recovery in investment markets. Large withdrawals around retirement are best planned in advance.

Retirement alone is generally not a trigger to reduce the riskiness of your super. Instead you may want to pursue an investment strategy that has an appropriate balance of security and growth, as your super may need to last you for up to 30 years. If you’d like assistance with planning a retirement strategy for your personal financial situation, you could start by making an appointment to talk with one of our ESSSuper Financial Advisers.¹

1. ESSSuper Financial Advisers are authorised representatives of Link Advice Pty Ltd (Link Advice). Link Advice holds a current Australian Financial Services Licence No. 258145 and is responsible for the financial services provided to you. ESSSuper has an arrangement with Link Advice Pty Ltd to provide financial advice to ESSSuper members. ESSSuper pays Link Advice a fee for this service. Neither the Board, nor the Victorian Government, guarantee or endorse any recommendations made by Link Advice, or are responsible for the advice and actions of Link Advice.

The information contained in this article is of a general nature only. It should not be considered as a substitute for reading ESSSuper’s Product Disclosure Statement (PDS) that contains detailed information about ESSSuper products, services and features. Before making a decision about an ESSSuper product, you should consider the appropriateness of the product to your personal objectives, financial situation and needs. It may also be beneficial to seek professional advice from a licensed financial planner or adviser. An ESSSuper PDS is available at www.esssuper.com.au or by calling 1300 650 161.

What have we learnt from the GFC?

It’s now 10 years since the Global Financial Crisis spread panic and devastation through investment markets. What lessons can we learn from this regrettable event?

What triggered the GFC?

The inevitable aftermath

Lesson #1 – don’t invest in something you don’t understand

Lesson #2 – invest over the long term

Lesson #3 – plan ahead for retirement

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