So much cash, so little confidence

Although still cautious, investors are looking for ways to put their money to work.

Investors are still hurting from losses caused by the global financial crisis and are understandably cautious about their next move. But the urge to recoup some – or hopefully most – of those losses over time is pressing and investors can hardly be expected to sit back and wait for the global economic recession to unfold.

The big question on everyone’s minds is: where do I put my money in 2009?

Holding on to cash lock-stock-and-barrel – while tempting – is certainly not the way to go. Cash has normally been used to moderate the performance of a portfolio during rough patches or to provide liquidity. Cash has never really been a good proxy for investing and holding on to it in bulk will certainly lead to missed opportunities.

In the past, fund managers and strategists would have jumped at the chance to advise investors on where to put their money by recommending this or that asset class, market or product. But these days, most of them will answer the key question on investors’ minds with two questions of their own: what is your risk tolerance level and what is your timeframe?

That’s not an exciting discussion to have, but one that’s absolutely necessary given the post-Lehman Brothers world that we live in.

For sure, those two questions were already part of the discussions between fund managers and investors before the US credit crunch led global financial markets to where they are now. But this time around, risk tolerance level and investment horizon are critical to those discussions, rather than on the periphery.

Even before considering any asset allocation (or reallocation, as the case may be), investors are now being urged to seriously asses what kind of allocation suits them best. One main reason global equity and bond markets went into a tailspin post-Lehman Brothers’ collapse was due to the fact that many investors’ portfolios were mismatched with their risk profile and investment horizon. By now, everyone is familiar with the stories of moms and pops losing all their savings in investments gone awry last year. In large part, institutional investors – typically a conservative lot – were spared from the monumental mistakes that were made by retail investors or even high-net-worth individuals. But that’s not to say that institutional investors didn’t suffer from substantial market losses as a consequence of the financial turmoil.

One of the biggest mistakes investors made over the past two years, even after the onset of the US credit crunch in 2007, was to hold on to the belief that the good times in the asset classes they were in – whatever they may be – would last forever (or at least for a long, long time). Of course, these days, the default defence to staying heavily invested for so long is that the credit crisis and its global impact were not really fully understood until it was too late.

Generic approaches to investing – equities versus bonds, China versus India, Bric (Brazil, Russia, India, China) versus Mena (Middle East and North Africa), hedge funds versus private equity – aren’t going to work this time. In fact, it would be disastrous to make sweeping assumptions about which asset class or market would serve your money well.

Investors need to make sure their portfolios meet their requirements for income growth and are cognisant of whether their timeframe for realising those potential gains is this year, the next, or beyond.

There’s no singular investment prescription – there has never been – but somehow that message was lost in the past, thanks in large part to the bandwagon effect during the bull years. Asset allocation or the exact mix of holdings will depend mainly on investors’ risk profile and investment horizon.

A consensus is forming, however, in terms of advice for a typical investor who’s raring to make the most of the next few years while still reeling from the pain of the last 18 months: get out of the safety of government bonds within the next few months, move into corporate bonds, and gradually accumulate equities.

Elsewhere, the lack of consensus reflects the uncertainties in those asset classes. The prospects for property are mixed, the outlook for commodities remains clouded, currencies are expected to trade within a narrow range, and potential returns from hedge funds are in question given that the majority failed to deliver absolute returns last year.

Whatever investors end up doing this year, they must do it mindful of the lessons learned from the global financial turmoil. There's something to be said about investing cautiously, even when markets turn for the better.

The February edition of AsianInvestor magazine contains a feature on where investors should put their money in 2009.

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