Australia’s investment community at large has suffered a crisis of confidence due to the ructions that befell global markets in recent years. Thankfully, Australia has not been as heavily affected as other major established and developed economies. However, investors will still remember the past 2 years as a time when forgotten investment lessons remerged, eg  investment markets can be extremely risky and diversification is the only free lunch.

When looking back at the market over the past 2 years, it becomes evident that it was not just markets that were responsible for the lowest returns in over 50 years. A certain amount of blame lies with the way investment products were bundled up and sold on to retail investors, and the remuneration practices for the creators of these complicated structures.

The global financial crisis has now re-established basic principles that investors need to hold close and that were thrown away when financial markets around the world were sky rocketing; ie risk and return are definitely related, diversification is absolutely essential and asset allocation is a key determinant of long-term performance. These principles should remind investors about the events of the past few years, how they should think about investments moving forward, and how to deal with financial service providers in the future.

One of the main lessons that investors have learnt is that nothing is guaranteed. Investors need to carefully consider ’guaranteed products’, as they have complicated ‘trigger’ events and are usually only guaranteed if held to maturity. Most of them are exposed to highly risky markets, but the concept of a guarantee lures smaller investors into using them, without really understanding them.

Simplicity and return of capital should always be considered in front of complexity and return on capital. If you don’t understand the investment and how it works, then there’s a good chance that the sellers don’t either, as they haven’t been able to clearly explain it to you. Investors have now learnt that some structures use layers of leverage, which has layers of fees, all to create greater rewards for the provider.

Investors have been told time and again never to put all their eggs in one basket; however this principle seemed to disappear in the period leading up to the global financial crisis. Investors have now learnt the importance of this concept and that the only way to offset this risk is to diversify; both across and within asset classes.

A further important lesson investors learnt over the past 2 years is that there is no substitute for cash. Other investments such as bonds, debentures, mortgage trusts, hybrids and certain cash ‘enhanced’ products do actually carry a higher risk than cash, for which investors can be rewarded with a higher return. These types of investments may have a place in a fixed interest portfolio; however, there is only one investment that has cash-like risk, and that is cash itself. Therefore, for those investing for short periods of time cash or term deposits are in most circumstances the most appropriate investment.

As the investment community slowly starts to move back into financial markets, the emphasis is now on recouping losses. The only way to prevent the greed that nearly crippled the financial world from reappearing is for all of us to embrace these age old investment principles and for governing bodies to closely monitor existing and any new rules. Failing this, it won’t take long for everything old to become new again.