January 27, 2009
When faced with tough economic periods in the past, one response was to resort to raising trade barriers – this was a key contributor to the Great Depression. The good news is that there are no signs of a global trade war – and indeed we continue to see movement towards reducing trade barriers (albeit slower than some would like).
Since the commercialization of the internet in the mid 90s, we’ve seen hundreds of billions of dollars invested in the technology that permeates our personal and work lives. While this technology has led to compressed margins and severe pressure on some industries (think travel agents and newspapers, for example), on balance it continues to be a huge driver of increased productivity – and with higher productivity come heightened profits. Another benefit of technology is higher return on research and development - the impact of processing power and instant communication is paying immense dividends in making research dollars more efficient, as information on new discoveries is disseminated in real time.
The best talent migrates to those fields offering the most recognition and highest pay. As a result of stratospheric compensation in the financial industry, an entire generation of the best and the brightest young people aspired to be financial engineers. Already signs point to a return to reality on compensation levels, leading to some of that same talent becoming real engineers, where their drive and abilities are going to be put to better use.
One final positive development for advisors will be more realistic expectations for investors. The good times of the past few years led some investors (and not a few advisors) to become complacent about risk. As recently as a year ago, clients in balanced portfolios were pushing advisors to increase their equity component and investors were looking to boost the exposure to aggressive stocks in their portfolios. Just as the tech bubble taught investors to be cautious about sky high valuations, this market will leave a lasting impression on clients about the kinds of returns that can be realistically achieved without undue risk.
We continue to have real issues ahead of us and the unwinding of the excesses of the recent past will continue to be painful. When thinking about investment prospects, however, it’s important to help clients understand that we are in that part of the market cycle where the problems seem overwhelming, and any positive signs are ignored. Historically, exactly these kinds of environments represent the best times to invest.
* Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries and to reach him, go to www.strategicimperatives.ca.
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