This article was contributed to us by Loo Cheng Chuan.
It was the year 2006, and I was lucky to have read a book by Simon Sim titled the “Joseph Cycle”. The book predicted an imminent stock market crash in 2008 and I was convinced. I also sought advice from my financial mentor in the light of the impending financial cash.
When the 2008 Global Financial Crisis hit, I was ready for it and even profited significantly from it. Subsequently, I became a more seasoned contrarian investor and was able to profit much more from the 2012 Europe Debt Crisis and 2015 China stock market crash.
Clear Risks Of A Global Economic Downturn
Today, from a macro-economic perspective, the risks of a global economic downturn are high.
US-China trade war has escalated as both countries have imposed tariffs of up to 25% on both sides. US national debt has hit a record high of USD$22 trillion, which is 108% of their GDP.
China’s economy growth has also slowed down to 6.5%, a far cry from the double-digit annual growth a decade ago. Chinese tourists are no longer flocking to South East Asia and Europe in droves. A real estate glut of 50 million empty homes is pushing China to the brink of a property bubble explosion.
Europe is faring no better: UK’s Brexit is in limbo, Italy is in a recession and many European countries are nearing zero growth. Many prominent economists and financial experts are forecasting a 2020 global recession.
Amidst all these, Singapore, which relies extensively on global trade, will also likely be hit.
Yet the US stock market S&P500 hit a record high of 2,945 points in Apr 2019 and the US economy is now enjoying a record 10 years without a recession.
I cannot accurately predict when a recession and a stock market crash would happen, but I believe the risks are now very high. However, given my experience over the last 3 stock market crashes, here are some advice that I would like to offer my readers.
Follow An Investment Strategy That Has Stood The Test Of Time
Your investment strategy should be one that has been proven to stand the test of time, and economic cycles. For example, US broad-based indexing especially in the S&P500 or the Dow Jones would be one that has survived all economic downturns in the last century. Diversify your portfolio across cash, CPF, bonds, shares and properties. Never put all your eggs in one basket.
Don’t Panic Sell!
At the first sign of a stock market crash, most investors would become fearful and start panic-selling all their shares, with many of them hoping to buy the stocks back when the market hits the bottom. It is very difficult, even for stock market experts, to time the market (selling at the market peaks and buying at market bottoms). However, if you follow a good time-proven investment strategy, there is no need to panic sell.
Rebalance Your Portfolio Away From Time-Unproven Assets
Unfortunately, most investors purchase high-risk investment assets based on gut feel, hearsay, market rumours. These include penny stocks, speculative stocks, crypto-currencies etc. Many of these assets have not been proven to stand the test of time and may never recover from a financial crash. I would think twice about keeping them in face of a high-risk stock market environment.
Prepare For A “Big Rainy Day”: Retrenchment
I always encourage others to have enough cash reserves to tide through 3 to 6 months of “Rainy Days”. The worst-case scenario for you in a recession is to lose your job. Figure out how much you need each month for basic subsistence and add on sufficient CPF reserves to service your housing mortgages for 3 to 6 months. Being prepared financially would be your best protection.
Reduce Your Leveraged Risk
Many gutsy Singaporeans have substantial exposure to leveraged investments – borrowed money to invest in stock market and properties. Most of these leveraged exposures are in 2nd and 3rd property investments where the owners use rental income to finance their monthly mortgages. In recessions, many property owners cannot find tenants easily to service their rental. I would advise investors in leveraged positions to prepare much larger cash reserves to protect themselves or reduce their leveraged exposure.
Build A Financial Safety Net With 1M65
There is no better bulletproof investment than your CPF Special Account (SA) monies in a financial crisis. Regardless of how the market swings, your SA savings still compound exponentially at 4 to 5% per annum. If you were retirement-secured by knowing you’ll have $1 million by 65 years old in your CPF, your investment emotions would be better stabilised to react more rationally in a market crash.
Accumulate Cash To Be Ready For The “Great Stock Market Sale”
Market crashes are the best time to pick up good assets at “fire-sale” prices. But, if you do not have a cash war chest, you would miss out on the chance. Substantially reduce extravagance in your monthly expenditures by spending only on “needs” and less on “wants”. I would also suggest avoiding major expenses such as a new car or house purchase. Swap your expensive holidays to Europe, US or Korea to one in Malaysia or Thailand. Cut down on restaurant meals and avoid compulsively upgrading your iPhone to the latest model.
Food For Thought
The tricky question is: When is it a good to buy in a market crash? I shall leave this question open for discussion with readers on Facebook and I will follow up with another article on the day of reckoning.
Economic downturns and stock market crashes exist and we cannot avoid them. The best way to face them is to be prepared, both financially and emotionally, by following the advice that I have described above.
When you do so, you’ll be able to appreciate Warren Buffet’s contrarian mantra: “Be greedy when others are fearful (, be fearful when others are greedy)”. I wish you success in weathering the imminent stock market crash, and hope you’ll even profit handsomely from it eventually.
Loo Cheng Chuan,
Loo Cheng Chuan is a father of three and founder of the 1M65 movement. To find out more about the 1M65 movement, you can watch our DollarsAndSense Tonight interview with him: