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Are you ready to come out on top from a recession? (Part 2)

Thursday, August 22, 2013


Think that a recession will be beneficial to you? Ask if you have these:

1. Certainty that you will not lose your job or take a pay cut if you still need the income.

2. Certainty that you do not have debts which might turn crippling.

3. Certainty that you have the funds to take advantage of any value for money investments.

Of course, you know what they say about the only two things which are naturally certain in this world and they are none of the above.

The first statement is basically the most important for the majority of us. How to have a secure income? Work in the civil service? That is the closest to an iron rice bowl I can think of. If we do not have an iron rice bowl, we better be thinking of having more than one rice bowl just in case.

The second statement is an important consideration for anyone who has debt. Anyone from the middle income category devoting more than 60% of his monthly income to debt servicing, in my opinion, is running a big risk. This is also why the government came up with the latest property cooling measures to prevent people from over extending themselves.

The third statement is something that regular readers are familiar with. We must have a war chest. Now, this war chest is not money we set aside in case of an emergency. This war chest is money in excess of that emergency fund. It is truly money that we can afford to lose. I mean we wouldn't want to lose it but if we should lose it, it should not sink us into financial difficulty.


For a recession to be good for us, we must be in a good condition. Are you ready?

Related posts:
1. Do you want to be richer?
2. Get on top of your finances.
3. Be prepared for war!
4. Are you ready to come out on top from a recession? (Part 1)

17 comments:

Musicwhiz said...

Good post, thanks.

Job wise, most of the current Gen Y have not experienced a severe recession with mass retrenchments. Even the GFC did not produce that effect in Asia as it was USA and (now) Europe which saw a lot of troubles and high unemployment rates. So many may get caught unaware as the Government has always been touting very low unemployment.

Somehow I think the problem of high debt is not confined to just Singapore; most of Asia is also binging on debt if I read correctly. No thanks to the massive printing by the Federal Reserve which has flooded Asian market, whether bond or equity. If what MAS says is true, then quite a few households are overextended! Even if they are not, a combination of job loss (for either spouse) plus some debt would basically kill off your cash flows and plunge you into possibly negative equity AND negative free cash flow, a very undesirable situation indeed.

War chests need to be really bountiful. I personally hold about 12 months of my expenses as my "core" stash, with another 12 months as a reserve fund. The rest is my deployment fund for equities. Most people don't have a very large safety stash, therefore they start to panic during downturns or when a big expense arises (e.g. hospitalization). This is why insurance is also critically important, especially H&S!

So I think forget about coming out "on top" in a recession; if the man on the street can simply survive it, it would be quite an achievement already.

But if somehow you have the attitude and the aptitude to take advantage of an economic downturn, then you should be on your way to financial freedom!

L Young said...

An insightful piece. The response from Musicwhiz is equally astonishing.

Thanks to both!

tccs077_blog said...

Hi AK

Are you anticipating a recession?

la papillion said...

Hi Ak,

I think first is to learn how to survive. Next is to learn how to be resilient and robust. Lastly is to learn how to take advantage of such crisis to end up benefiting from it. I think the first 2 points you mentioned deals with surviving and being resilient. The last point is a about coming out better after the crisis. It'll be wise to concentrate on the first 2 first. I'm Nicholas nassim taleb's language, it's about not being fragile first, then robust, then antifragile :)

veronika said...

Recessions come and go. Its like the tide, and it happens all the time. There is never a situation where an economy does not experience recessions, all things being equal.

An important point to note is the length of the recession. The 1997 Asian Financial Crisis was short and affected specific sectors of ( Singapore's) economy.

In my opinion, SARS affected every sector.

Even the world depression back in 1930's did not affect every single country as badly as USA.

Singapore is very unique. Recessions cannot last long for one reason:

The Gov props up many sectors with their deep pockets and long reach.

They control news of retrenchments.
Behind the door negotiations with business owners ensure that bad news is balanced. We all know how sentiment affects markets, even if the TA & FA tells us otherwise!

It will be short. Governments around the world ( USA,Japan,EU, China ) are very, very aware of the interconnectedness of economies. They have seen what QE can do and more importantly how crumbling economies can be ring fenced and proped up.

Sell nothing... stay invested.
The technique is:

Hold on and enjoy the ride!!

veronika said...

Guys, ( gals) dont you think its the length of the recession that is key?

If businesses cannot last 6 months, then I think that may be a good question before investing in it!

AK71 said...

Hi MW,

Those in their mid 20s or even late 20s might not have felt the full impact of a severe recession as a working adult. This could lead to a feeling of false security.

You are right to say that the world has gotten used to cheap money. So, although many have gotten drunk on cheap debt in Singapore, it is definitely not unique to us. There could well be a regional contagion just like what we saw in the Asian Financial Crisis if things weaken enough. Just need the first domino to fall.

Like I always say, we are the little people and we cannot influence policies. We cannot change the flow of the river but we can make sure we have all the tools to ensure survival or even comfort in the process. :)

AK71 said...

Hi L Young,

Borrowing something from my boy scout days: Be prepared. ;)

AK71 said...

Hi tccs077,

I don't know what to anticipate. I know that I am prepared for one if it should happen. :)

AK71 said...

Hi LP,

I agree with you. That is why they are points 1 and 2. They come first. ;)

I didn't want to be too specific since an earlier blog post questioning whether some people should be thinking of investing in stocks at all got quite negative feedback on my FB wall. -.-"

Kelvin said...

Looking at the global situation, I am currently rebalancing my portfolio by taking profits and diverting funds into my war chest. It's always good to have a definite plan to capitalize on the recession. Right AK71? ^^

AK71 said...

Hi veronika,

Indeed, economies and businesses go through cycles like so many things in the world.

I have imperfect knowledge and I hedge my position, therefore, by staying invested while having a war chest ready.

AK71 said...

Hi Kelvin,

Well, I do not know if a recession will definitely happen. So, it is natural that I do not know if I should sell any of my stocks.

Is this a good time to sell? Honestly, I don't know.

Actually, if I look at the numbers, most of the stocks I hold are not expensive. They are either fairly valued or undervalued.

So, I am keeping the status quo. Just sit back and collect regular passive income from my investments which will beef up my war chest. :)

Singapore Man of Leisure said...

AK,

Ah! We must learn from our lady friends the art of seduction - never reveal the specifics; always leave something to the imagination ;)

You learn fast!

AK71 said...

Hi SMOL,

Er... I think the people who commented on my FB wall are guys. Got ladies? Maybe. LOL.

SOLIDCORE said...

Hi AK,

What would your views be if one is to take a loan from Banks at the bottom of a recession to buy large amounts of high yielding REITS, Eg 12% - 17%? (*Got interested in your marginal stocks post and started thinking)

It's a crazy idea but truth be told, in a market where REITs paying 12% - 17% would most likely do very well compared to our current markets of 4% - 8%. (*Studied the 2008 GFC data of REITs till now and all things being equal, the payout is very encouraging.)

Hopefully I'm not opening a can of crazy idea worms.

AK71 said...

Hi Solidcore,

It is not a can of worms. You have a good idea but whether we would have the guts to do it is something else. I could have emerged much richer from the GFC if I had the guts to do what you just suggested.

I remember how in the last crisis, a retiree mortgaged his landed property, got 2 or 3 million dollars and dumped the money into REITs. I think he locked in 15% to 20% in distribution yields. Of course, his investments, even after the recent correction in prices, are still very much in the black.

Gutsy!

Buying well run REITs at a discount to NAV and with a double digit distribution yield is definitely an attractive idea. We just have to learn to ignore all the naysayers and there were plenty during the GFC.

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