Looking back can help inform what direction to take in the future

Reviewing previous decisions provides an opportunity to measure their success with the benefit of hindsight. This is something I would commend to any investor: look back now and again and remind ourselves of why we reached such conclusions.

This can often be a humbling experience, but the important point is to learn from past decisions, both good and bad. Did I buy bank shares because they were undervalued, or because they were cheap? We all love the idea of a bargain, but giving your money to a company generally implies a belief that it is a sound business with growth and profit prospects. Recent events have served to remind us all that things are far from rosy among our high street banks, so why did we not see this earlier?

Similarly, why did so many people follow the herd and pile into absolute return funds, with the mistaken belief that regardless of overall market conditions positive returns were assured? Or invest in commodities, or the emerging super powers of Latin America and India, only to see their investment eroded to a degree that causes genuine unease?

To counter all of these examples, even more investors simply chose to remain in cash. They were happy to accept meagre deposit rates and accept a loss in the real value of their capital in return for a belief that at least their capital was secure.

Investors are typically resistant to change, and often remain obstinate in their approach to markets in general. Many are resistant to accepting that changes in belief may be to their advantage. The classic wait and see approach, or sitting on the sidelines in the belief that at some point it will feel safer to invest in real assets is still very common.

I spend a lot of my working week speaking with industry insiders such as fund managers, and in spite of their perceived advantage over the rest of us when it comes to investing capital, many are as unsure as the rest of us as to where markets may be headed next.

Fundamentals and common sense tell them that risk assets should be a lot lower and falling. However, the lure of a magical white rabbit being pulled from the European hat make it very dangerous to be short or underweight in anything.

Tying all of this together, the key word is risk. How an investor views risk determines their entire approach to investing capital. In many cases, it leads to a decision not to invest at all. Yet perversely when they feel the risk element has gone, they will pile into often extremely volatile investments.

My experience over the past 20 years has taught me that risk is a function of valuation, and the more expensive the asset, the more risky it is. Right now, the sovereign debt of Western nations is horrendously expensive. Decent company shares by comparison might not be cheap but they are not excessively expensive and more importantly they will survive.

Exactly a year ago I wrote a column for this newspaper which offered some thoughts as to where people might invest. At that point, I recommended equities on a selective basis, urged caution with supporting absolute return strategies and defended gold as a diversifier. I also questioned the blanket support for strategic corporate bond funds. A year later, would any of these recommendations have added value to a portfolio? Well, all of the real assets cited have outperformed the best deposit rates by a considerable margin, in spite of the recurring negative headlines we all endure.

Make no mistake, we live in volatile times. However, the requirement to both protect and where possible nurture the value of capital never goes away, and it involves being in the game.

l Ken Taylor is director of Mackenzie Taylor Wealth Management