Thursday, January 01, 2009

The Demise Of Wall Street And The Lessons For 2009

An insightful article titled The End and written by Michael Lewis, the author of Liar's Poker, recently appeared at The article discusses the end of Wall Street in 2008 as a result of the blow up in the mortgage market. More telling is the lack of understanding by Wall Street firms surrounding the risk they were taking. In short, the article implies Wall Street investment bankers didn't care as they were laying the risk off to other investors and the firm's shareholders. The article is a must read!

A lesson in all of this as we go into 2009 is investors must understand the type of investment approach that is being employed in their investment accounts. A particular investor doesn't need to understand the process down to the minute detail; however, they should be comfortable that their investment manager can explain the process in an understandable way. If you are investing in a hedge fund, your adviser should be able to explain the investment approach in layman's terms.

What is for certain as we look to 2009 is investment advisers will try to "sell" new approaches to managing ones investments. Just as advisers were pushing technology stocks at the end of 1999 and asset allocation over the course of the last two years, there will certainly be new approaches pitched to investment clients in 2009. As 2008 was one of the worst investment markets on record, investors may be looking to better understand what their adviser's investment approach was in 2008 and what it will be in 2009. I am sure new buzz words will include terms like rotation, tactical allocation, etc. Asset allocation certainly did not seem to work in 2008 as nearly all asset classes came under severe pressure and had high correlations.

As investors meet with their advisers, asking questions (even the same question in a different way) about the investment approach is a must. If the adviser talks about tactical allocation or rotation, be sure the adviser can articulate the factors behind a particular approach. Also, be sure the approach is not being pitch because it would have worked in the recent past. The investment approach needs to be one that will work going forward and one that has worked over the long run.

No comments :