INSIGHTS: Lessons on Investment Management From the Global Recession and Bear Market

Frank J. Jones

Volume 8, Number 1, First Quarter 2010

The current global recession and financial crisis have significantly affected virtually all investment managers. The severity of the effects on investment management risk has induced many investment managers to reconsider their investment approaches in terms of investment management risk. This paper summarizes and evaluates many of the resulting lessons learned by the author from these effects of the crisis. The perspective is that of a high net worth investor. Some of the lessons learned by investors, however, are inappropriate responses to the investment crisis and are refuted. These are, however, other responses investors should learn and consider using prospectively. These responses include both modified responses to the financial crisis we have witnessed and also new quantitative methodologies which have been developed to treat the investment problems which have been encountered. Among the issues considered are: (1) the utility of MPT; (2) the development process of contagion and a quantitative response to contagion; (3) quantitative and qualitative rebalancing; (4) recent evidence on the ERP (Equity Risk Premium) and the stock/bond allocation; (5) the paradigm of extreme events (a.k.a. the black swan) and hedging extreme events; (6) the changing role of liquidity in investment management; (7) a consideration of risk tolerance in portfolio development and others. Overall, the paper reviews both potential strategic and tactical responses with respect to these issues to the recent severe financial crisis from the perspective of a high net worth investment advisor.