I wasn’t actually working in the world of financial news when the first signals of the credit crunch started to appear, instead ensconced in the cosy world of technology consulting. The first clue I had that something was up was when a friend of mine asked me whether he should move his money out of one of the seemingly attractive Icelandic Isas that had hit the UK. I didn’t know much about the Icelandic banking system at the time, but I have always followed the adage that if something seems too good to be true then it probably is, and that’s exactly what the Icelandic Isas seemed to me, offering interest rates well above those the high street lenders could offer. I suggested he cut and run and he did, saving himself a lot of bother getting his money back from the FSCS.
My current ‘too-good-to-be-true’ worries centre largely on the passive industry, which has attracted huge inflows in recent years. As a low-cost way to access markets the attraction of these products is clear, and we often recommend them ourselves as part of rounded strategies; we get that high fees eat into returns, and know that many active managers aren’t worth their salt. But I am concerned at the presentation of ETFs as an investment panacea, because it has created the impression that investing is easy and riskless. It is not, and the recent allure of ETFs has been enhanced by the fact that the indices they track have performed very well, not least in the US where ETF usage is highest. What happens when the US bull market comes to an end? If money is being pulled into markets by ETFs and in turn supporting the performance of those markets, the reverse effect could prompt an ugly scramble for a narrow exit.
Like many post-crunch warnings about the brewing next crisis, my fears may be misplaced – for now. But if the credit crunch taught us anything, it is that complacency should be avoided – especially when bandwagons are gathering speed.
