Articles on investing

April 2009

Investing during the financial crisis

The last two years have generated a ball of gloom in financial markets. It got rolling with a local financial crisis when finance companies began to fail in early 2007, then in the latter part of 2008 came the global crisis and now we are faced with uncertainty over how long, and how serious, the current recession will be.

What are the lessons for investors and the investment sector from this unprecedented series of events?

Inevitably many New Zealanders have suffered. Property values, share prices and deposit interest rates have all been cut and some, caught up in the finance company collapses, have lost their life savings.

These experiences have often had different causes, but they have all been rolled up into the ball of gloom and blamed on the global financial crisis.

The first lesson I think is one for everyone - don't let this gloom dominate your thinking.

Most of us invest one way or another whether we like it or not. The majority of New Zealand households own their own home, KiwiSaver membership is approaching one million and that's not counting the myriad of other ways of investing such as banks, finance companies, unit trusts and shares.

Investor confidence has been seriously undermined, and there's still a lot of uncertainty, but we need to remember that by and large we have a robust investment environment in this country.

Few New Zealanders were directly exposed to the complex financial products that set the global financial crisis in motion.

Also the government's retail deposit guarantee scheme assures depositors that investments with approved institutions (including some finance companies) are guaranteed.

For the investor, the last couple of years have reinforced the need to carefully research investments. Know what you are getting yourself into and especially understand the risks.

At the moment some investors, hurt by low interest rates, may be inclined to chase the best possible return which may have unwelcome risk attached.

Risk is something investors have to live with, it's a key element in any well functioning capital market, but that's no reason to invest dangerously.

Always look beyond the big print. Read prospectuses and annual reports and if there is anything that is not understood, get expert advice. If you still don't fully understand the risk then don't invest in the product.

For the investment sector, I think the global financial crisis has emphasised the need for high-quality corporate governance, that is, strong accountability, good management and robust systems, including risk controls.

A commitment to all these things goes to the heart of investor confidence.

When you examine the causes of the crisis, the international investment community's lack of risk assessment and control is suspect number one.

New Zealand's investment regime is disclosure based. The onus is on anyone offering investments to give full and accurate information so investors can make informed decisions.

The directors are really the only ones with the full picture.

It's not the Commission's job to eliminate risk for investors. But at the moment we have a role in restoring investor confidence by helping make sure a full picture is available.

To this end, our priorities include implementing supervision of financial advisers, streamlining capital raising rules, increasing public understanding about investing and greater attention to finance company enforcement.

The finance company failures seriously dented investor confidence. They were the result of an ugly mix of poor advice, poor disclosure, bad governance, inappropriate business models and under capitalisation in a number of companies and a lack of regulation in this sector.

But it needs to be remembered that finance companies are a small part of the financial market with lending at around 10 percent of the banks.

The fact that the failures began in early 2007 - when a recession and a broad financial crisis were far from most financial observers minds shows why investors need to be vigilant, in good times and bad.

Others also need to fulfil their responsibilities. Those offering investments must be honest, competent and conscientious; trustees and auditors, diligent; and regulators such as ourselves must be vigilant and focused on protecting investors, not from themselves, but from the unscrupulous and incompetent.

Then the investment market and investors will be set to make the most of the opportunities arising from the inevitable economic upturn.

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