Many equity investors are often seen as naive optimists or gamblers in the stock market and a class of investor that is easily panicked when bad financial or political news makes headlines. The days of the dot.com bonanza, when the average investor was content to accept higher risk to obtain a compound return of 20 % p.a., has now been replaced with extreme caution, acceptance of next to zero interest concurrent with negative real returns from bank deposits – the perception being to protect capital. This is typical behavior of these investors during volatile markets driven by that herd instinct mentality seeking the ‘safest’ place to keep their hard earned money.
Paradoxically this ‘conservative’ strategy by investors’ in fear of the present financial crisis is indeed doing the opposite. They are lending (depositing)their cash to the very institutions that are now extremely vulnerable to failure with banking collapses or big problems being experienced in the financial system. They fail to realize that the guarantees issued by governments is limited in value and is really only as good as the financial soundness of the government and reflects at best ‘good intentions’. Should the government fail, this guarantee is worthless and that places deposits at risk.
Let us consider the governments both in Europe and the US. These are de facto bankrupt having increased their debts on a daily basis beyond what we would term financial prudence. Some governments have already declared bankruptcy (Greece, Portugal, Ireland etc).
The Financial system is already preparing for a ‘hopefully only’ possible failure of banks and countries. This is reflected in the downgrading of both sovereign and banks credit rating by the credit rating agencies. Thus to have blind confidence by handing over a big part of the family savings to this system is at best ‘careless behavior’.
The conclusion to be drawn is very clear: In the case of a serious failure of the financial system the state would have little chance of fulfilling their verbal /’legalized’ obligations. There is no legal right for compensation during a financial meltdown and that has serious implications for depositors. We can look no further than Iceland for confirmation of this.
It should be remembered by potential private investors that, as a shareholder with investment in hard assets such as Equities, Properties and/or Commodities, a longer term view should be taken for what they are strategically striving for. Investment in these hard assets benefits them in a number of ways; the increasing value of their shares as reflected in long term profitability of these multinational enterprises, diversification in terms of different sectors and countries. Therefore provided the investor is prepared to take a longer view, these investments represent a ‘real safe haven’ for the future both in terms of income, growth and capital protection. It is very unlikely that, as an example, 2,000 multinational companies will fail simultaneously and thereby wipe out ones hard earned money where as depositing hard earned money in one or two banks could.
For further questions about investing your capital please visit www.lapis-am.com or don’t hesitate to contact us on info@lapis-am.com.
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