5 things the recession has taught us By N e a l K e l ly
It’s said that we learn more from our mistakes than from our successes. If that’s the case then smart investors and savers have a lot to learn from the trials and tribulations of the Irish economy over the last few years. With a challenging few years ahead of us we need to re-evaluate where we are when it comes to managing our assets. Property is not always the answer Given the events of recent years this point now seems like a bad joke but it’s an important one and one that we should striving never to repeat. The rapid expansion in the country’s prosperity and population in the late-1990s drove the value of Irish property through the roof. Many people stopped seeing their houses as homes and began to view them as assets to be bought and sold in a bid to capitalise on rising values. ‘Unlocking the value’ became the buzzword along streets, avenues, estates, highways, byways, backstreets and boreens nationwide. Investors began to use whatever money they had available to snap up apartments and houses across the land, banking substantial profits on sales; profits which were fed back into the market to buy more properties. No longer was it enough to own the family home plus another property as a ‘nest egg’, people began to speak about their property portfolios. For many amateur investors there was quite simply no other show in town. But the show quite simply couldn’t go on. When the property market stalled in 2007 and then began it’s downward plunge, many property investors were left with assets that they simply couldn’t sell. Those that did sell were more often than not
left nursing big losses. Seemingly bullet-proof and future-proof, Irish property as an investment asset quite simply proved not to be market-proof: in short, it has its up and downs just like any other asset and right now it’s on a major downer. Diversify, diversify, diversify If the dramatic collapse of the Irish property market taught us anything, it taught us the value of diversification. Many Irish property investors appeared to focus their attentions and money on just the one asset: property. This left them over-exposed to the market’s 2007 collapse as they were unable to counter-balance the fall in values with a rise in the value of other investment assets and sectors. Even investing in Irish shares wasn’t a good diversification strategy, because construction and property-related stocks accounted for a sizeable proportion of the Irish stock market. These assets were heavily-correlated which meant that they would experience their ups and downs at the same time. Effective diversification involves the selection of investment assets which are uncorrelated - different assets types such as a mixture of stocks, currencies, bonds and property, and different territories such as Ireland, Europe, the Far East and emerging economies such as the BRIC countries of Brazil, Russia, India and China.
2012