When an issue is dominating the headlines, it can sometimes be difficult to understand the most important elements of what’s involved. I feel this way about the global economic crisis of 2007-2008.

Looking back on those days, I remember news stories that were being dominated by queues of people outside Northern Rock branches and the UK government deciding to bail out a number of leading financial institutions. There was a real sense of confusion about how this situation had arisen; there were also clear concerns about the implications for many individuals.

There was certainly a sense of personal tragedy here too, with people losing their jobs, as financial institutions failed. For many of us, it seemed like an event that was shaking the foundations of what we knew and understood to be true. We’d assumed that, when we placed money in accounts with leading high street lenders, that such money was safe. Indeed, this was always promoted as one of the reasons for holding money in a bank account.

We might laugh at the thought of choosing to hide money under the mattress. After all, such a course of action represented a real security risk, leaving yourself open to the possibility of your life savings being stolen. The impact of inflation would ensure that the value of your savings would fall too. How could this possibly be the right way to behave?

We inherently knew that it made far more sense to concentrate on placing money in a bank account. There, it would be safe and would accrue some level of interest.

Now, it seems that the goal posts have changed. That level of certainty has been diminished and we find ourselves looking at banks in a new light. We thought that they were looking after our money. We appreciated the fact that they would need to derive an income from our deposits, but did we ever imagine that they would be investing it so recklessly?

This is where the story starts to get interesting for me: it becomes a tale about the way in which investments are considered. How do we look upon elements associated with risk? We know that financial professionals give due consideration to the risks that are involved in investing. What we witnessed, of course, was the banks losing sight of such fundamentals.

We wouldn’t expect fund managers to behave in the same way, given that their performance levels are closely monitored. How do we feel, however, about the way in which we approach investments?

 

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