When the world banking and Eurozone sovereign debt crises hit in 2007 and 2008, there was an understandable rush by investors to switch their investments to safe havens. The assets classes that were most popular were gold and currency such as US Dollar, Pound Sterling, Norwegian Kroner, etc. Demand for the Swiss Franc was so strong that its value grew by 20%. The Swiss Government acted swiftly by cutting the value of the Franc and pegging it to the value of the euro.
The Bonds [debt] issued by Germany, France and Netherlands were considered a safe haven and the flight into these bonds caused yields to fall. The result was that investors were prepared to purchase German 10-year bonds with a coupon of 0% – people were no longer interested in the return on their money but were largely focussed on the return of their money.
As one of the bad boys, Ireland suffered from the withdrawal of all foreign deposits from our banks. Irish banks were forced to offer extraordinarily high rates of interest of over 5% pa to depositors just to keep deposits on their books. Many investors took the opportunity to gain some out-performance especially when equities [shares] and property were falling through the floor.
Much has changed in the meantime but many investors still continue to hold investment, pension and ARF monies in what they believe to be “risk free” deposits, even though 78% of people believe that deposits aren’t a good return for their money. Interest rates on deposits have fallen sharply in the past year and investors could suffer real losses as inflation, when it eventually gets going, may erode the capital value of their deposits.
Now is a good time for investors to review their portfolios and look at moving them to other investments. Understanding your attitude to risk has never been more important and completing a risk questionnaire with your financial broker can help you realise that you must accept some risk to achieve the target returns you need.