You would be forgiven for guessing that the above statement was made in 2009, as Mr Iacocca saw his former company file for Chapter 11 bankruptcy (along with the loss of his company car). The quote does have that 2008, post-Lehmann ring about it, doesn’t it? In fact, he made that statement on 20 October 1987, the day after the crash. It might surprise you to learn that our current and ongoing angst concerning indebtedness is nothing new.
You might even recall Alan Greenspan, Federal Reserve Chairman, in a speech to the American Enterprise Institute in late 1996, coining the phrase ‘irrational exuberance’. He was commenting on the ‘undue escalation’ in asset values that ultimately proved to presage the ‘dot com’ bust in 2000.
More recently, a J.P. Morgan report has highlighted the fact that in the US confidence is falling, resulting in a number of economists cutting their GDP growth forecasts to around 2% – the consensus having been over 3%. The report tells us that monetary growth has slumped around the world, additionally citing the fact that the Baltic Dry Index – a measure of the cost of shipping – has fallen over 80% from its 2008 all-time high; such high prices imply dramatically fewer containers are being shipped. Where does this bleak outlook leave investors?
I am strongly in favour of building portfolios matched to an investor’s attitude to investment risk and their personal aspirations. Investors should then expect fluctuations in returns, knowing that in the long term they should arrive at their investment destination with the outcomes close to what they might have expected.
On the other hand, the investor might be my wife. Being a photographer, and therefore more at ease with vignetting than volatility, she is adamant that a capital sum she wants to invest for our three year old son’s school fees should have an element of certainty attached to it. In effect what she is saying is that she wants more protection. Now protection isn’t a bad thing. Considering that risk is probability (P) multiplied by impact (I), and given we live in a thatched house, I’m rather less interested in mitigating the basic risks like spilling a pot of paint on the carpet, than I am about my roof catching fire. The chances of my roof being alight are relatively speaking remote, but the impact is literally devastating. So I insure against that unlikely event because on the P X I equation, it’s worth it. Regarding school fees, whatever my attitude to investment risk, I have to curb my enthusiasm and elect to have some sort of insurance against a ‘tail event’, ie one that is unlikely, but has huge impact if it does occur. And the last ten years have illustrated that markets may exhibit extremes of behaviour.
So when I have such a requirement, ie a liability target I dare not miss, how can I build a portfolio that fits with my attitude toward investment risk and performs accordingly, but limits the amount I’m prepared to lose to a tolerable level? In other words how can I insure my portfolio against a catastrophe?
For those who need some certainty, but also opportunity, protected funds might offer a suitable solution. For instance, the Skandia Shield Fund, provided by Commerzbank in partnership with Skandia Investment Group, offers investors the opportunity for growth but with protection against a low probability, high impact event such as a 20%+ fall in markets.
So despite steering well clear of the Swan Vestas I continue to pay my house insurance. I also continue to sleep well at night safe in the knowledge that should a catastrophe befall the roof over my head, the smoke alarms are fully functional and I am covered by my insurance company. Protected funds, such as the Skandia Shield Fund, might not guarantee you a good night’s sleep, but they should certainly help.
Graham Bentley is Head of Proposition at Skandia.