Investors cannot afford to ignore the prospect of another stock market freefall, MLC has warned on the twentieth anniversary of the ’87 crash.
“Swings in investor optimism make the market vulnerable to sudden declines,” MLC head of capital markets research Susan Gosling wrote in a report released yesterday.
“Less likely – though more important than is often thought – is the possibility that something goes seriously wrong,” Gosling said.
“We’ve had such an incredibly positive run of economic growth and real returns this doesn’t seem like a real possibility – but ignoring it can mean investors blow their chance to earn adequate long-term returns,” she said.
Speaking at an investment briefing yesterday, Gosling said recent swift action from Central banks to stem liquidity problems – seen in their quick response to America’s sub-prime mortgage woes – showed they had learnt from the mistakes of the Depression and the Japanese slump of the 1990s.
“Central banks have learnt an awful lot about how to deal with crises,” she said.
Executives from National Australia Bank’s wealth management division have reiterated their mantra that portfolio diversification is king.
“For investors, first make sure the strategy is adequately diversified,” Gosling said.
“But all the good effects of proper diversification can be lost if investors panic during a crisis,” she said.
“Almost always the right thing to do is stick with your strategy – don’t sell after the market declines. And one of the keys to this is avoiding being sucked into taking too much risk as markets boom.”
MLC investment analyst Charles Brooks said a key lesson for investors from ’87 was to maintain a portfolio strategy in all market circumstances, or risk destroying their wealth.
“If you don’t maintain your portfolio you exacerbate the volatility drag,” Brooks said.
MLC investment analyst John Owen said investors do not give enough thought to liquidity and it is not talked about often enough.
“It’s probably most important to you when it doesn’t exist,” Owen said.
