It’s a decade since the Lehman collapse. A seminal moment in financial history that divided time for anyone that works in money. Before Lehman and After Lehman.
An event so major not only from the perspective that it prompted a financial crash that wiped nearly 25 per cent off the FTSE but because of the systemic flaws in the system it highlighted. Banks could go bust. They were once seen as the safest place to put your money in (savings) and on (stocks and shares) but they were suddenly under public and government scrutiny (and in some cases ownership).
The UK may not have made a quick recovery but it’s not all been bad news in the years since. The sector has been made safer and more robust through regulation and reform. The stock market revival on both sides of the pond has been phenomenal. Investing in banking sector shares may not provide the returns they once did but other businesses have risen to the top.
In the ten years since, has this event forced people to get more savvy about their personal finances?
The Lehman’s collapse acted as a catalyst for change and continues to do so. The banking industry navigated its way out of this crisis with assistance from governments and central banks. They have structurally reduced the risk in their business models, bowing to the demands of regulators, investors, and the wider public. This means that banks cannot grow profits as quickly as they once did, but also that they are far better capitalised and in a stronger position to deal with any economic mishaps. A decade on from the collapse and central banks are only just removing the emergency assistance which they provided, while economic risks from China’s credit binge, the threatened trade war and Trump’s protectionist measures, Brexit, and the crisis in Turkey, Argentina, and Venezuela to name but a few, continue to pose challenges. If you bring all of this down to a human level, with all these micro and macro market forces, it’s no surprise that clients are taking much more of an active interest in their money.
- Cash no longer king: The newspapers are calling it a ‘lost decade for savers’ because low interest rates adopted to support the rebuilding of the economy have meant sums have barely grown or are worth less due to inflation. This has been great for borrowers, but it has meant a complete rethink for people with the belief cash was king! Interest rates are slowly rising but we’re a long way from the days when cash in a savings account in a high street bank was an investment strategy in itself. People are becoming more open to and educated about stocks and shares and other investment vehicles. This has been helped by the introduction of products such as stocks and shares ISAs.
- Innovation: The world today is a very different place. Crisis creates opportunity. Innovations in peer-to-peer lending, crypto currency and developments in fintech could be credited with igniting a new interest in investing with early adopters. All of which are now entering the mainstream.
- Stockmarket returns: The stock market recovery can be credited to digital businesses such as Facebook, Apple, Amazon, Netflix and Google (Faang stocks) that have risen in value. The weaker pound has also boosted returns for UK investors.
- Stagnant wages: Real wages are below pre-crisis levels, according to ONS data when you consider inflation. When you can’t rely on a salary increase to buoy along your finances then it makes sense that people will take more interest in how to make the money they do have, work harder for them.
- Pension black holes: The Bank of England’s quantitative easing programme has driven down the interest rates pension funds can earn over the long term. This coupled with longer life expectancy, the end of final salary pensions, government reforms to state pensions and falling annuity rates have created the perfect storm and people have had no choice but to give pension planning some serious consideration. Penny wrote about this last week, you can read it here.
- The Promise of property: House prices have made a strong recovery in the past decade in some parts of the country but the latest ONS data tells us that they are now rising at the slowest rate in five years. In the downturn after Lehman’s, when house prices were low, investing in buy-to-let property became a popular asset to hold in your portfolio. However sweeping tax reforms such as changes to mortgage relief, increased stamp duty and capital gains tax seems to be spooking smaller landlords as the government hopes these measures will level the playing field for more first- time buyers.
We’re six months away from Brexit in the UK and the question is do we face another crisis? Or is it fair to say that constant change is now the new normal? If you are worried about your investments, then we still stand by the age-old rules of having a risk level aligned to your life stage, diversified portfolio of assets (don’t put all your eggs in one basket), regular re-evaluation of your goals and rebalancing of your portfolio. This will mean you can ride the rough with the smooth. The savvy investor who stays on top of this, or who works with a financial adviser who does this job for them, is in the best position to weather any storm.
Penny Lovell, Sanlam Private Office
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