Lessons for Advisers from the Crash of 2008
- Acknowledge that the markets are and always will be riskier than we know, and that we have no way of knowing what will happen or what is even possible.
- Don’t participate in strategies that contain unquantified tail risk – the more times we take such risk, the more likely are we to experience the consequences.
- Make investment strategies more conservative for everybody – forget the simulators and risk tolerance (its ok to have an all-bond portfolio).
- Get to know your individual bonds and index (including bond) funds really well (to avoid costly manager mistakes, though some actively managed conservative bond funds are great too).
- It doesn’t matter that somebody was able to pull off some risky strategy X – it all comes down to what you are comfortable handling and explaining to clients.
- Cash (through CDs) can be a great investment too (for many clients who don’t have enough of it anyway).
- Stick to what works all the time, rather than most of the time (saving and principal preservation provides most of the investment returns)
- Don’t trust software – it is almost always wrong (unless you use it as a calculator or as a demo tool), and of course, avoid making ‘projections’ – they will almost always be wrong.