Editor's
Note: Recent years have truly been a roller coaster ride in the
global financial markets, and research from MyPrivateBanking shows
that many private bankers have used the chaos as an opportunity to
fill their pockets rather than protect their clients. Here research
director of
MyPrivateBanking Steffen Binder, talks about the five
golden rules for investors to navigate the turbulent economic
markets.

Since 2008
markets have seen a lot of up and down movements. For instance, the
German Dax has lost a third since this year’s high in May. The Dow
is down by almost 15 per cent. And the Eurostoxx50 has even lost
about a third. Back in 2009 the picture looked just the opposite.
Many indexes gained 40 per cent, 50 per cent or even more from their
lows. Other asset classes have shown a similar picture: just have a
look at the charts for commodities, government bonds (depending of
course on the country) or currencies.

In 2009, just
when stock markets hit their lowest lows, we published a report
showing just how pro-cyclical and short-termist the advice of many
(but not all) private banks was at the time. The closer markets fell
towards their eventual lows, the more advice private bankers issued
to avoid cheap stocks at any cost, invest in already highly priced
government bonds and stick to cash. Even clients with some risk
appetite were advised to trade out of stocks.

In most cases
private bankers suggested either having no stocks at all in asset
allocations or keeping the stock portfolio insignificant, an approach
that suggested a high degree of confidence in their own ability at
market timing. A confidence that, as events unfolded, was proved to
be unjustified.

Sound
Familiar?

Today, we have
a similar situation: bankers advise their clients to switch their
assets into safe havens such as gold, Swiss Francs or Asian
currencies and cash. But only a few months ago, when the stock
indexes approached their highs, many banks increased the stock quota
in their asset allocation recommendations.

It’s exactly
this kind of behavior, market timing and trading in and out of asset
classes that enriches the banks and reduces performance for private
investors. Trading fees and commission on trades can have a big
impact on portfolio performance.

But what should
an investor do when markets succumb to turmoil or even crash? Just
stand by and watch his or her wealth crumble? Numerous studies have
shown over and over again that for the overwhelming majority of
private or professional investors it is almost impossible to time the
market correctly over a longer period of time. Burton Markiel,
finance professor and author of the seminal work A Random Walk
Down Wall Street writes:

“Mutual-fund
managers have been incorrect in their allocation of assets into cash
in essentially every recent market cycle. Caution on the part of
mutual-fund managers (as represented by a very high cash allocation)
coincides almost perfectly with troughs in the stock market. (…)
Cash positions were also high in late 2002 and in March 2009, at the
trough of the market.”

Substitute
wealth adviser for mutual fund-manager and you get exactly the same
picture. Yet, if market timing does not work, what should you as an
investor do in a volatile phase such as the one we are currently
facing?

The
Golden Rules

There
are five golden rules that summarize the collective wisdom of
libraries full of research on modern financial markets and investor
behavior:

1. As famous
investor Warren Buffett remarked: “Be fearful when others are
greedy, and be greedy when others are fearful”. So, do not let
emotions cloud your decision making: a bull market should not make
you overly happy and a bear market should not throw you into panic,
neither should this happen to your private banker.

2. Your overall
strategy as well as your general risk tolerance should always remain
the same (with the possible exception of your personal situation
having changed). Your private banker is there to execute this
strategy – regardless of market cycles.

3. Watch your
private banker or wealth manager closely – always. Question their
decisions, especially in times of strongly growing or falling
markets. Get on their nerves. Pepper them with questions. Make them
earn their money.

4. Do not buy
into securities you do not understand or which your wealth manager or
private banker cannot reasonably explain to you. This is especially
true for complicated structured products or black-box hedge funds.
Such products will come back and haunt you during times of crisis.

5. Do not
hesitate to ask your private banker to revoke any trades you have
doubts about. If you feel that your wealth manager isn’t executing
your agreed upon strategy, do not hesitate to find a new private
banker.