Government bonds are seen as a more reliable hedge (Getty)
As the financial world evolves, one seasoned investor reflects on a career spanning more than 5 decades, extracting lasting lessons from a dynamic journey marked by innovation, regulatory transformations, economic booms and crises. Drawing on his personal experiences and insights, British financial journalist John Blinder - in an article published by the Financial Times - sheds light on the basic principles that have stood the test of time.
Lesson 1: Diversification as a risk management tool
The narrative begins in the late 1960s, a time of financial abundance embodied by the New York Stock Exchange's "Nifty Fifty" growth stocks. Blinder recounts a pivotal lesson he learned during a review of the Imperial Tobacco Pension Fund, led by renowned expert George Ross Guppy.
Ross Jobe challenged conventional wisdom by shifting the fund's investments from supposedly safe securities to stocks, promoting diversification within this asset class. The result was a strong portfolio, and the importance of diversification became clear, albeit in a different way than traditional methods.
Diversification in investment is necessary to achieve stability and reduce risks (Getty)
Blinder commented at the time, “This was a practical lesson in how diversification works, even if it was not in the way that economists like Harry Markowitz had envisioned.”
Lesson 2: The risks of market timing
The 1970s brought turmoil, driven by deregulation and economic transformations. One notable event was the decision by US President Richard Nixon to abandon the convertibility of the dollar into gold in 1971. The ensuing market volatility highlighted the unpredictability of global asset prices. The narrative underscores the futility of trying to time the market, relying on historical events as investors struggled to get back into the market after a downturn.
Lesson Three: Money Supply Signals and Inflationary Realities
Blinder points to the dot-com boom of the late 1990s, highlighting the inherent challenge posed by economists' steadfast belief in market efficiency. The narrative delves into the psychological factor of fear of missing out (FOMO) that drives market bubbles, along with subsequent responses from central banks. This phenomenon was observed in the 2007-2009 financial crisis, underscoring the critical importance of responding to money supply signals and recognizing restrictions on government bonds as a hedge during periods of inflation.
Lesson 4: The illusion of safe investments
Reflecting on the post-crash period of the first decade of the 21st century, Blinder points to a return to a pattern reminiscent of the post-World War II period, in which pension funds, under pressure from regulators, gravitated toward government bonds in search of safety. However, the narrative challenges the idea of safety in investments, warning against creating systemic risks through standardized strategies.
Regulators' attempts to make individual pension funds risk-free make the overall market structure riskier (Getty)
In this context, Blinder says, “regulators’ attempts to make individual pension funds risk-free make the overall market structure more risky.”
Lesson Five: Navigate the Unpredictable
In conclusion, Blinder reflects on the continuing rise of debt, acknowledging the inevitability of a major debt reckoning. While gold may not provide insurance against falling prices, government bonds are seen as a more reliable hedge. The conclusion reflects the cyclical nature of financial markets and the need for investors to adapt to the evolving nature.
Source: Financial Times