“The value of investments may fall as well as rise and you may not get back your original investment. Past performance should not be viewed as a guide to future performance.”
How many places is that phrase used on brochures, radio ads, TV ads, websites and countless other places talking about investments. And yet, when asset values plummeted with the economic decline, somehow people were shocked. Yes, the degree was anomalously precipitous. But so had been the years of build up. Of course, we know from Attribution Bias, people feel that ‘gains’ are more ‘earned’ by them. Their clever thinking outwitting the market. And that declines are considered either (a) bad luck, or (b) a conspiracy against them. I’m not sure that investments haven’t been rigged to the disadvantage of small investors for starters, but at the very least, the crunch has reminded a generation of a very important truth about investments. They may fall as well as rise.
When bond trader turned fiction writer Sheila O’Flanagan did an interview in the Money section of the Sunday Times, she made a great comment in response to “What has been your worst investment?”…
- “I own shares in Allied Irish Banks and Bank of Ireland. They were fantastic during the good years. I should have cashed in my profits, but I just didn’t think we were in as bad a position as we were when the credit crunch hit. I lost about €10,000 (£8,000) and hold them to remind me; it’s a slap in the face every time I think I know what I’m doing.”
Every executive should have some Irish Bank stocks tucked away in their portfolio to remind them of the importance of both Leadership (optimise rise) and Management (minimise fall) in their business. The value of businesses can rise and fall too.