During both booms and busts, there is always a group of investors who believe things could get worse. It’s probably not the worst mentality to have. Constantly protecting your capital and investing conservatively does pretty well over time. While you might not achieve the highest returns in booming years, you also don’t lose your pants in a crisis either.
I would argue a conservative approach is also becoming more important as the frequency of financial crises increases. According to Deutsche Bank analysts, financial crises are an increasingly regular occurrence if we look at the big picture.
Frequency of Financial Crises
The chart below shows data compiled by Deutsche Bank. As you can see, the frequency of financial crises has been increasing as time goes on.
Source: Financial Times; Deutsche Bank and Global Financial Data
It’s likely that the more market participants there are, the higher the likelihood of a crisis. This is because most investors have a herd mentally. They follow other investors and push up the market to unnecessary highs and down to unnecessary lows.
As reported by The Australian Financial Review:
‘…the era we live in does indeed have more financial crises than those that went before.
‘This is true globally, demonstrated with a welter of statistics, and there is a clear point at which the crises began to accumulate: August 1971, when President Richard Nixon brought the Bretton Woods agreement to an end, ending the tie of the dollar, and ultimately most other currencies, to the price of gold.’
Possible Financial Crisis Catalysts
But along with their historical research, Deutsche Bank also names a range of catalysts that could trigger the next crisis: an economic recession, a central bank unwind (selling bonds to lift interest rates), a government default (likely Italy), among others.
While the trigger may be unknown, I believe a future crisis is inevitable. Learn how to protect yourself here.
Junior Analyst, Markets & Money