The Flight to Quality

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If there is one upside to a market upheaval, it is the demise of the weak. In the long run, we need strong, efficient markets. The Global Financial Crisis is the most recent and memorable example of a shake-up that in due course, left the world’s financial systems in much better shape than they had been before. There were many casualties throughout this strengthening process. Every now and then we need to be shaken out of complacency to re-examine how we do business and how we invest. This is another one of those times.

When investment markets are growing well, even fools prosper. When times are tough, the successful investors will be those who have made the right choices based on sound reasoning rather than emotion and herd behaviour. The underlying theme for success is quality. Quality decisions and quality investments.

We are heading into another period where there will undoubtedly be more casualties. Businesses will fail and investors will lose money. However, the failures and losses will not be across the board. Now is the time to be thinking about who is likely to succeed and who is likely to fail.

From an investor perspective, credit ratings are an important, although not infallible tool when investing in bank deposits and bonds. Every investor should know and understand the credit rating of their bank and any bond investments. Useful information on credit ratings can be found on the Reserve Bank website. For direct investment in shares, look to the fundamental value based on an objective assessment of future company earnings, rather than market sentiment. For managed funds, independent ratings are available. Important factors to consider are the size of the fund, the strength and track record of the manager, and the management style. Quality is the key to success.

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