Here's some ten-years-old investment advice | Value Research If investment advice has an expiry date, then it's already dead and should be buried
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Here's some ten-years-old investment advice

If investment advice has an expiry date, then it's already dead and should be buried

Here's some ten-years-old investment advice

On this website, in our magazines and in other publications, I often write in my columns that if investment advice has an expiry date, then it's already as good as dead. Only if it stays relevant for years, is it of any use to begin with. Sometimes, readers write back and quibble about this and ask for examples, so that's what I'm going to do today.

The following are long excerpts from something I wrote exactly a decade ago, as the recovery from the huge crisis of 2008-09 had started. As we struggle with a sort of a crisis today, it's fascinating to see how the argument I gave in October 2009 has not aged at all:
The last couple of years have seen savers getting worried by the kind of things that only investors used to bother about earlier, and with good reason too. By savers I mean the kind of people who put away money in banks, insurance, mutual funds and other such type of assets. Investors, on the other hand, are people who trade in investments. Typically, savers just salt away money and dip into it only when they need the money but investors buy and sell based on their expectation of how the investment markets are doing.

However, the traumatic events that the world economy has gone through have made savers just as concerned about markets as investors used to be...

At this point of time, the mood in various investment markets around the world has settled into one of optimism. The fact that it has settled is important, because it tells us about the quality of the mood, and actually carries more information than the bare numbers. Till a quarter or so ago, there was an underlying tentativeness in investors' behaviour. They knew the story, they could see the direction and they could understand the logic, but they hadn't yet forgotten the horrors of 2008. Like survivors of some great disaster, they couldn't quite believe that it was actually over. Is this shift in perception justified? Perhaps it is, but there are some pretty strong opposing arguments also. Let's see what the arguments on both sides are.

The Optimistic View: It's true that the crisis was a severe one, but a great deal was done to resolve it and all of it succeeded. Economic growth is back all across the world. Moreover, India and other emerging markets have proven to be resilient to the worst impact. From an investors' perspective, the downturn wasn't all bad news. As the economic outlook deteriorated, equity prices plunged. However, the bad news was over-discounted. Corporate growth and profit numbers were never as bad everyone feared they would be. Moreover, they've recovered quite sharply. The global economic decline was nowhere near as bottomless as the doomsayers would have had us believe.

... perhaps the most important factors were the strong actions that governments around the world took to arrest the crisis. As much as the actual actions, the most important discovery of 2008 was that governments are capable of quick and decisive actions. When the situation threatens to spiral out of control, there's someone there to bring it back under control.

That was the bright side of the argument, now let's hear it from the dark side, the folks who think that the worst may still be ahead: The root cause of the crisis was a huge liquidity glut which encouraged or even necessitated a massive ignoring of risk and inflation of asset prices. Not only has this not been solved, huge chunks of 'stimulus' may actually have made it worse. What we see in the stock markets and some commodities and are beginning to see in real estate is the same asset price inflation that is driven by excess liquidity without much regard to fundamentals...

Those are two sides to the debate and the logic for both is impeccable. Which one will appeal to you more depends on what sort of a mood you are in and that probably depends more on what kind of personality you are and how the downturn is affecting you personally. The important thing is to appreciate that either view may actually be right.

But isn't that a problem for the ordinary saver? Not really, as long as he realises that none of this actually has much bearing on how he should save. Through the panic and collapse of 2008 and the surge of 2009, one thing became clear. This may have been the worst economic crisis the world had seen for a long time, but those who stuck to the basic tenets of savings could well have slept through it. All that one needed to do was to make sure that firstly, money required in the short-term was in bank deposits and other safe assets. And secondly, long-term money that was in equity-backed mutual funds had been invested gradually over a long period.

Those whose investments conformed to these simple principles came out fine through 2008-09, and will come out fine regardless of which of the above two scenarios is closer to the truth.

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