This month marks 10 years since the start of the upheaval that led to the financial crisis of 2008. In the UK, September 2007 saw queues outside Northern Rock branches as people tried to withdraw their money, signalling the first ”˜run’ on a UK bank in a generation. A year later, Lehman Brothers, a 150-year-old global institution, filed for bankruptcy in the US.
The details of the catastrophic economic events that led to the crash and the post-crash banking fall-out have been well documented, but a decade on, it’s important to see what has happened since then and more importantly for investors, what the future might hold.
THE WINNERS
Government Bonds or Gilts have been the winners over the last decade. They have outperformed most other investments, enjoying a total return (income and capital) of 85.2%. This is a result of the historic low rates of interest over the last 10 years. A decade ago, the yield on a 10-year bond was 5%. Today it is around 1%
As interest rates fell, Government-backed Gilts became more and more attractive and those that invested in them have benefitted from locking in higher rates of interest and the price increasing in recent years.
Shares have produced a total return of 65%. Rather than growth, much of this return has been the reinvestment of dividends.
THE LOSERS
The worst performer over the past 10 years has been cash deposit savings, which have returned just over 11% on average. In July 2007, a saver could expect 4% pa on their savings, today this would look like 0.39% pa.
THE FUTURE
It is unlikely that cash returns will improve for some time. Predictions are that interest rates will rise to 1% by 2022 and peak at 2.5%.
In fact, the future for bonds looks tricky too. The only way is up for yields and down for values which may mean a negative return for some people who invested at the wrong time.
It is likely that shares will do better than bonds over the next 10 years, although there may be a reliance on dividend over capital value again.
ANOTHER CRASH?
With shares in US at all-time highs and in the UK near all-time highs, investors would be wise to prepare for a market correction or crash. A correction could be short and sharp, but no-one knows when this will happen – that is what makes it a crisis.
You can mitigate any potential losses by having a long-term plan and a portfolio that is diversified in terms of assets and geography. This will enable you to navigate the falls and subsequent bounces backs with the least trouble.
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