ifast insight- learning from past financial crises

By allison lee

financialplanning

Important: See Disclaimer on Page 6 | iFAST INSIGHT 23

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22 February ~ July | 2009

Article disclAimer: This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund’s prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. As some of the authors/contributors may have a personal interest in some of the funds commented on, investors should seek the advice of professional advisers regarding the evaluation of any product, unit trust or other financial instruments, report, index, opinion or any other content contained herein, to ensure the investment instrument is suitable for them. In the event that investors choose not to seek advice from a professional adviser, they should consider whether the investment instrument is suitable for them. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. iFAST Financial and/or its licensed financial advisers representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds.

By iFAST Editorial Team

iFAST INSIGHT interviewed a panel of financial advisers who experienced the Asian Financial Crisis, the Technology Bubble and the SARS Crisis, and got them to share the key lessons they learnt and their advice for investors in this current global financial crisis.

LEARNING FROM PAST FINANCIAL CRISES

Pundits are calling the current recession the worst the global economy has experienced in 60 years, since the dark days of the Great Depression of 1929. The implosion of the subprime-induced cred-it crisis that first emanated from the US and Europe in the latter part of 2007 has brought about an

economic storm that has swept across the globe.Equity markets worldwide have tanked, dispelling any talk of the “decoupling” between Asia and the US.

The US, Europe and Japan are in a recession, while closer to home, Hong Kong and Singapore have lapsed into technical recessions.

A quick look back at the recent economic crises brings to mind the Asian Financial Crisis (1997), the bursting of the Technology Bubble (2001) and the SARS Crisis (2003). History has taught us that the global economy has its boom and bust cycles; the global economy may be in shambles now, but the recovery will eventually happen.

iFAST INSIGHT interviewed a panel of financial advisers who experienced the Asian Financial Crisis, the Technology Bubble and the SARS Crisis, and got them to share how their portfolios were impacted then, the mistakes they made along the way, what lessons they learnt, and their advice for investors in this current global financial crisis.



LEARNING FROM PAST FINANCIAL CRISES

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In July 1997, the Thai baht collapsed, sparking off the Asian Financial Crisis (AFC) that lasted till February 1998. The effect of this crisis was felt throughout Asia. During that period, the MSCI Asia ex-Japan Index fell to a low of 316 points from 576 points at the start of the period – a 45% drop.

While Singapore was not the worst hit, it too suffered from the AFC. Rather than intervene in the market, the Singapore government allowed the Singapore stock mar-ket to weather the volatility. The STI fell 43% from 1923 points at the start of the period, to a low of 1082 points.

iFAST spoke with two veterans of the financial indus-try who lived through the AFC. Raymond Wee is currently an Associate Director in Financial Alliance and leads a team of consultants. He started his career as a tied agent before becoming an independent financial adviser and has more than 13 years of experience in the Financial Services industry. Sani Hamid is the Director of Wealth Manage-ment in Financial Alliance and has been with the company for more than 15 years. They shared their experience and insights in the following interview.

iFAST: What was this crisis about? How was your portfolio impacted then?RAymond Wee (RW): The AFC led to much gloom and doom in the general population. At that time in 1998, most people had the same end-of-the-world (or rather end-of-the-market) feeling as we do today. In the financial services industry, we were also not spared that sentiment. There was much talk that the dismal economy would drag on for years. With that, the heyday of the financial serv-ices industry, which had seen good growth since the early 1980s, was over at best, or it would be wiped out at worst. Some of my colleagues left the industry to pursue other things. My clients who invested in my company’s single premium investment-linked products (ILP) funds made average losses of 40%-50% on their principal amount.

SAni HAmid (SH): The AFC was about - like many other crises – excess. Excessive foreign currency borrow-ings and reckless lending by the banking system, especially to non-productive sectors of the economy, are just two of

the issues that led to the demise of many corporations and pushed banking systems in Asia to the brink. Simply put, Asian economies saw a period of sustained growth for a good part of the 1990s which eventually went beyond what these economies could sustain fundamentally, as evidenced by large current account deficits and persistent inflationary pressures.

It was a painful lesson. Like almost everyone else, the finan-cial market meltdown hit my portfolio severely. The only bright spot was that having only just been in the work force for about four years, my investment portfolio was not too large. However, it was my trading portfolio which did the most damage as I suf-fered losses of a few thousand dollars related to contra trades. And back then when my monthly salary was less than $4,000, it was painful.

iFAST: What are some of the mistakes you (or other people you know of) made as a result of this crisis?RW: The financial services industry was not as developed back then as it is now. We did not have the tools to create a diversified portfolio for our clients, as the number of funds available to us as tied agents were limited. We did not have the opportunity to work with a unit trust platform with over 300 funds. Hence most of our clients’ investments were pooled into either an Asian equity fund or a global equity fund from the same fund manager. As we did not practice portfolio creation, we pretty much did not split our clients’ investments into equity-bond mix.

We had one other global bond fund and a Singapore fund, which I shunned due to their slow growth prior to the crisis com-pared with Asian and global equities. The years prior to 1998 were like the years from 2004 to 2007 where the market could do no wrong. Everything an investor threw his money at made profits. Anything that was seen as slow, stable growth was not at-tractive.

When the crisis struck, our clients’ investments did more poor-ly than now, as we did not put in bonds to cushion losses, nor were we able to access better-performing fund managers. When I made the switch to join an IFA in 2004 and had the opportunity to make the comparison of the Asian equity funds, I realised that in the period from 1997 to 2004, the top Asian equity funds were performing at an excess of 20% per annum year-on-year (yoy), whereas the one my clients invested in from my tied company only did 9% p.a. yoy!

THE ASIAN FINANCIAL CRISIS

Raymond WeeSani Hamid


By iFasT ediTorial Team

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➝A grave mistake committed by many in the financial serv-

ices industry was to quit. The industry has continued to see growth and if we engage our clients in the proper way, we will still be relevant to our clients and can add value to their financial planning process.

SH: I bought a stock called Uniphoenix. The price had dropped substantially and on the charts it looked poised for a rebound. What the chart didn’t tell me was that it was going to get suspended. It has remained suspended until today, for a good 10 years.

iFAST: What did you learn from this crisis?RW: Diversification can help cushion losses, though it cannot buck the trend. With equities losing up to 60% of their value since November 2007, most bond funds lost only 5%-8% in the same period.

Ultimately, the market will recover, given time. As men-tioned, at that time in 1998, we had the same end-of-the-world feeling as we do today. My clients, who invested in my company’s single premium ILPs, were sitting on losses of 40%-50% of principal and there was pressure from them to sell. However, even those who invested in the market highs of 1997, made profits of an average of 5% per annum, when they held their investments to 2004/05. This is a reasonable return given the limited tools available in terms of fund avail-ability and diversification into different instruments.

SH: I learnt a few key lessons in that crisis. The first and foremost is not to over-leverage. In other words, “Don’t play contra if you cannot manage the leverage”. The crisis also taught me how markets could turn suddenly and that no mat-ter how many times you hear the words “we are different”, as many countries tried to differentiate themselves from Thai-land after the baht’s collapse, financial markets are closely intertwined.

iFAST: How has this crisis helped you to plan your clients’ portfolios better in 2008?RW: It has given me conviction that markets, no matter how disastrous, will recover. This has enabled me to reassure my clients who have made losses, to hold on to their investment objectives that they started off with and stay invested for the next 5-10 years.

SH: Based on the (painful) lessons I learnt in 1997, I exited the equity markets in Q4 2006 as I felt very uncomfortable with how markets had rallied unabated, reminiscent of pre-1997. With hindsight, it was a full 12 months too early and I had to contend with the fact that markets rose much more during that period. But I feel vindicated now as prices have collapsed way beyond my exit levels. Now I have in fact gone back into the market via dollar cost averaging because my capital is fortunately intact.

iFAST: What are your tips on how investors should face 2009?SH: We always like to believe “it’s different this time”. We thought we were different from Thailand when the baht tanked in 1997, we thought ridiculous valuations for internet stocks were justifiable in 2000 and in 2007, again we thought the world had decoupled from this crisis that originated from the US. Similarly, it will not be different - the market will re-cover. We believe markets will bottom in 2009, potentially even in the first quarter and in the worst case, in the third quarter. It will not be different as markets have normally bottomed in the same year growth hits a trough. And we expect that in 2009. As such, investors who ride out this downturn will be rewarded for understanding that “it’s never different”.

WHEN FACED WITH A CRISIS...do:

Keep calm.•do appropriate switching.•Get back into the market when you see good value and •not allow the scars from losses to scare you away.Be patient. I know a lot of people who keep averaging •down just because stocks have fallen say 10-20% from their original purchase level. Instead, wait for signs that the market has bottomed. For example, I believe the market has moved into a sideways base building consolidation phase. I believe this is the time to pick up stocks for those with a minimum time horizon of 3 years or more.Protect your profits. Increasingly, as crisis become •more frequent and severe, capital preservation will be a key feature in any portfolio. In fact, we are looking to introduce features into our clients’ portfolios which will help guard against sharp declines like that faced in 2008.

don’t:Sell off at a whim.•Believe every piece of news you read. Markets have •been known to be talked-down by the pessimism of economists.Link the economy with the market. Markets may recover •before the economy does.Be overly sentimental with losers. the question •investors should be asking themselves is whether the investment they are holding will be able to recover when the market does. the worst case would be to hold onto a stock or unit trust which will underper-form the market when a recovery takes place.

Source: Financial alliance Pte ltd



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In the mid-1990s to the early 2000s (right before the bursting of the technology bubble), technology and technology-relat-ed entities and stocks were all the rage. Dot-com companies sprung up at a pace previously unseen; almost every sizable dot-com entity was regarded to have the potential to be the next big thing in the technology space.

Bob Mock, Senior Consultant with Alpha Financial Ad-visers Private Limited, says, “At the peak of the Nasdaq index of over 5,000 points, the price earnings (PE) ratio went to an astronomical high of 62X. The bubble started to deflate when leading technology companies such as Cisco and Oracle failed to meet analysts’ earnings expectations.” He added that the crisis was perpetuated by investors’ greed for short-term gains and thirst for high returns which led to concentrated bets on technology shares, disregarding the golden rule of traditional asset class allocation based on investors’ risk profile and the need for portfolio diversification.

In an interview with the duo, they tell us more about the key lessons they learnt from this crisis. Victor Wu joined Alpha in 2004 and has 5 years of industry experience. Bob Mock, a senior consultant with Alpha, has more than 10 years of working experience in the financial industry.

iFAST: What was this crisis about? How was your portfolio impacted then?VicToR Wu (VW): At the height of the investment fren-zy, people were pouring their personal assets into the market, even quitting their jobs to be full-time day traders. This was also a period marked by rapid IPOs. There were 457 IPOs in 1999 (a rate of 1.25 IPO per day), most of which were tech-nology and internet related. 117 of them doubled in price on the first day of trading.1 A Venture Capitalist (VC) was once described as someone having deep pockets with short arms.

Even then, when an investment was pitched with a “.com” at the end, the VCs would jump right at it. Irrational exuber-ance – in the words of Alan Greenspan and the great War-

ren Buffet – was the order of the day. Millions of dollars were thrown to corporations with no clear business plan, to grow to the likes of Microsoft in an unrealistic time frame. 18 months became the golden standard for VC investment time horizon.2 To be fair, some company founders did strike it rich by selling their businesses at the early stages of the bubble. But majority did not and all these selective successful testimonies only served to create a larger false impression of the market.

Then on 10 March 2000, millions of dreams all over the world were shattered when the NASDAQ fell 33% in 1 month. And there was more to come, over the next 2.5 years, the NAS-DAQ lost about 78% of its value (closer to our heart, the STI lost about 50% during this period)3. When the dust settled, US$5 trillion of paper value had evaporated from the tech-laden index4.

iFAST: What are some of the mistakes you (or other people you know of) made as a result of this crisis?VW: A Gallup poll put out by Paine Weber was conducted on a group of investors in December 1999. In it, Warren Buffett was criticised by many for failing to take advantage of the phe-nomenonal rise in the IT stocks. Many investors were making extraordinary returns and had expected a 19% annualised re-turns in the next decade5. When the party was over, they were the ones who would kill to have the 12% annualised return in Berkshire Hathaway’s holding since 1965 to 2006. Buffett clearly knows something that we, mere mortals, do not. When caught up in the euphoric period of the mid-90s, people were throwing the fundamentals of the companies out of the win-dow. But Warren Buffett has repeatedly shown us that he is not in the business of buying over-priced assets. He was constantly seeking out undervalued companies which promised long term profits growth. In his 2000 acquisitions, there was not a single technology company in it, but a bunch of ‘boring’ companies, by any standard applied.

Another lesson which we observed from the technology sec-tor meltdown was the lack of diversification when investing. People were holding majority, if not exclusively, technology and internet stocks in their so-called portfolio. In our excitement, we forgot that there was a need to diversify across asset classes,

THE TECHNOLOGY BUBBLE

WHEN FACED WITH A CRISIS...

Bob MockVictor Wu




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regions and sectors. While some experts may frown upon the concept of diversification, it would be suitable for people in the Main Street.

BoB mock (Bm): As usual, mistakes were made by both retail and institutional investors. The main mistake committed by both type of investors was ignoring the basic rule of invest-ing, which is to invest based on sound business fundamentals. Institutional investors, such as analysts and fund managers, were talking up the technology sector as the only place to be in, while putting down “brick and mortar” defensive sectors as sunset investments.

Retail investors, meanwhile, failed to reduce their in-vestment risks by placing most of the money into technol-ogy shares or funds. This mistake, turned out to be a pain-ful lesson for them as they saw their wealth decimated when the NASDAQ crashed, and they were not buffered by other asset classes such as bonds, real estate and commodities in their portfolios. Another mistake made by some investors was borrowing to invest in the bull market, failing to cut losses fast to salvage their portfolios, and selling at much lower levels after several rounds of margin top-ups.

iFAST: What did you learn from this crisis?VW: To further add salt to their wounds, investors burnt by the market tended to over-react to market volatilities rather than respond in a rational manner. Just as greed rules our emotions when the going seems smooth, fear paralyses our mind when all seems lost. Investors pulled out of falling stock markets, completely disregarding market fundamentals. Sud-denly, all long-term investment planning becomes short term when faced with the fear of sustaining further losses.

It is painful enough to see a large portion of your investment portfolio evaporate in a fast and furious pace, but the thought of the possibility that the lost wealth might never return is just too much for some to bear. It is both personal and painful to acknowledge that expensive mistakes have been made. How-ever, there is nothing shameful in cutting loss, rebalancing the portfolio and moving on again, instead of permanently staying on the sideline, missing out of future market rallies after each crisis. There will never be a single event or a clear defining moment to indicate the bottoming of any financial crisis.

Bm: After the technology bubble burst, investors learnt that valuation does matter in long term investing and one should invest in companies that deliver positive cashflows and pay good dividends. Technology companies may produce state of the art programs or games but their business viabilities will be reduced if they do not bring in profits to sustain (their busi-nesses) for the long term.

We also learnt not to put all eggs in one basket as asset class allocation in portfolio does reduce investment risks through diversification. Investors should not confuse long-term invest-ment with short-term trading.

Greed as well as fear is bad for investors’ portfolios when one tends to chase after hot stocks when the shares are rag-ing, forgetting to buy stocks with strong fundamentals and low valuations. Conversely, investors are likely to sell out at market bottoms due to fear that their shares may go lower the next day with relentless bad news from reading the newspapers.

iFAST: How has this crisis helped you to plan your clients’ portfolios better in 2008?VW: The IT bubble as well as other market corrections that came along the way had certainly reminded us how important it is to invest in the long-term value of quality companies and not the ‘flavour-of-the-season’. We have just been reminded how frequently bubbles form, with the recent commodities bubble. In early 2008, investors were demanding to invest in the commodity sector. However, we felt that the over high valu-ation was just not justifiable to invest in and thus commodity products were not included in the portfolio. While the question on whether the commodity bubble popped depends on who you ask, clearly the fever has subsided just as abruptly.

When you have a game plan, stick to it no matter how tempting outside market noises may seem. Revisit your invest-ment objectives and time horizon to gain strength when your confidence seems to be wavering. This, coupled with periodic rebalancing of the diversified portfolio and a level-headed mind, would always do the trick. Identifying how emotions are affecting us is the key to preventing more mistakes from being made especially during the down times. Somewhere between greed and fear is that elusive sweet spot which we all can be at peace with.

Bm: Indeed, the lesson I learnt from the technology sector crash has proven to be invaluable to my practice. I have made it a point to construct diversified portfolios for most of my cli-ents based on their risk profiles and their personal preferences on certain asset classes or sectors. The portfolios constructed have a long-term perspective but short term tactical portfolio adjustments are used to enhance the returns or reduce risks in view of the constant changing economic environment.

I do not encourage the use of leverage in direct stock mar-ket investments or unit trusts as the losses will be magnified when market crashes just as the gains will be multiplied in a bull run. However, the current global credit crisis has added a new dimension to portfolio investment risk as this is the first truly global contagion triggered by the US real estate bubble. As a result of innovative financial engineering, some complicated derivative products are packaged out of subprime bank loans that are then sold to most developed and emerging banks that seek higher yields.

We have learnt that even widely diversified portfolios may suffer big losses in a short time frame and the current crisis may drag on for longer than expected. Investors are likely to accept lower returns or even negative returns in the near future if the credit market does not recover fast enough to allow

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Important: See Disclaimer on | iFAST INSIGHT 27

ADArticle disclAimer: This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund’s prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. As some of the authors/contributors may have a personal interest in some of the funds commented on, investors should seek the advice of professional advisers regarding the evaluation of any product, unit trust or other financial instruments, report, index, opinion or any other content contained herein, to ensure the investment instrument is suitable for them. In the event that investors choose not to seek advice from a professional adviser, they should consider whether the investment instrument is suitable for them. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. iFAST Financial and/or its licensed financial advisers representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds.



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➝normal lending and borrowing between banks and companies to resume.

As this (current) crisis is coined as a “once in a century crisis” by former Federal Reserve chairman Alan Greenspan, investors who have fully invested diversified long term port-folios, constructed based on sound fundamentals, must not waver and should look to invest further with spare cash, with an eye on the future recovery in the global stock markets.

iFAST: What are your tips to investors on how investors should face 2009?VW: In summary:- Set a realistic time horizon for all investment ventures

e.g. 5 years or more; revisit them from time to time- Invest in businesses that you understand- Diversify across asset classes, regions and sectors- Let the law of Dollar Cost Averaging work for you,

even more so during the present financial crisis- Accept that volatility is part of investment and that we

should be more aware of our emotions when making investment decisionsWe have been through countless financial crises and the

market will bounce back when all hope seems lost. During the Berkshire Hathaway Annual Meeting in 1997, Warren Buffet put it succintly, “If you’re an investor, you’re looking at what the asset is going to do, if you’re a speculator, you’re common-ly focusing on what the price of the object is going to do, and that’s not our game.” There are many learning experiences in life. Unfortunately, the high-tech shakeout has been a costly lesson to many of us. Already there are talks of ‘tech bubble 2.0’ looming near the horizon. The immensely popular so-cial networking site MySpace and video-sharing site YouTube have already encouraged scores of copycats. In 2006, there were nearly 180 new online video companies all trying to be the next YouTube. While the investment community is not behaving as irresponsibly as in the mid 90s, who is to say that given time, they will not bite?

Hopefully we will remember and learn from this IT bub-ble as with the present financial crisis, because if not, the cost will be much higher when the next global crisis hit us again. As we usher in the Year of the Ox with a weak clang, all our hopes and prayers are to see that it is enough to awaken the sleeping Bull.

Bm: 2009 is likely to see volatility as the credit crisis is going to filter into the real economy as more corporate failures may drag more countries into recession. Retail investors should re-frain from short-term trading if the golden trading rule of cutting losses is not imposed. I would urge investors to buy stocks with strong fundamentals that pay good dividends as cash is king in the current credit crisis. The important maxim of focusing on the long term must not be forgotten as success-ful investing has been clearly demonstrated by the investmtent guru, Warren Buffett, who preferred to hold stocks in his port-folio forever!


Stay calm and focus on the long term fundamentals of •the companies or unit trusts invested.Monitor and rebalance your portfolio to weed out •highly leveraged companies to lower risk.only look to add new positions in different tranches •when stock market stabilises.Invest in dividend paying stocks or unit trusts as it helps •to reduce overall losses in your portfolio.Engage a professional financial consultant to manage/ •monitor your portfolio to minimise emotional attachment to managing it on your own.

don’t:Panic sell out of your stocks or unit trusts on big down •days when the market crashes more than 5%.Borrow to invest during crisis as cost of borrowing is •usually high and the timing of recovery long.Invest too early when the market has just reversed its •uptrend and bad news is only starting to get out.Buy highly-leveraged companies or unit trusts that •may not be able to pay their debts due to worsening business conditions.Short term trading is not advisable as volatile market •conditions may wipe out your hard earned money and confidence.

Source: alPha Financial adviSerS Pte ltd

FootnoteS:

1 httP://www.inveStoPedia.com/FeatureS/craSheS/craSheS8.aSP

2 httP://www.grandbankScaPital.com/aSSetS/PdFS/our_team/bu_SPeech.PdF

3 httP://Sg.Finance.yahoo.com/q/hP?S=%5eiXic, httP://Sg.Finance.yahoo.com/q/ hP?S=%5eSti

4 httP://www.qctimeS.com/articleS/2006/07/17/newS/buSineSS/doc44b b0a1ab97ce159604273.tXt

5 httP://newS.bbc.co.uk/2/hi/buSineSS/1217716.Stm

6 httP://www.berkShirehathaway.com/2000ar/2000letter.html

7 httP://blog.Streamingmedia.com/the_buSineSS_oF_online_vi/2008/12/-online- video-comPanieS-raiSe-over-75-million-in-PaSt-60-dayS.html


Important: See Disclaimer on Page 6 | iFAST INSIGHT 29➝

On 15 February 2003, China reported 305 cases of what was then known as ‘atypical pneumonia’. Thus began a crisis that lasted till 28 April 2004, when the World Health Organisation (WHO) reported that the outbreak of Severe Acute Respira-tory Syndrome (SARS) was under control.

The impact of SARS was reflected in the STI, which fell by 9% from 1336 points at the start of 2003, to 1214 points in March 2003. While the impact of SARS was not as serious as other crises such as the Asian Financial Crisis, the psychologi-cal impact of the crisis was evident. In Singapore, quarantines, travel restrictions and thermal imaging became commonplace as the government took steps to contain the outbreak.

Jessica Koh of fin-exis Advisory Pte Ltd, has been in the financial industry for six years. She is a Chartered Financial An-alyst (CFA) charterholder, a Certified Public Accountant (CPA) and a Fellow Chartered Financial Practitioner (FChFP).

Sherlyn Chua, also with fin-exis Advisory Pte Ltd, has been in the industry for seven years. Both Jessica and Sherlyn lived through the SARS crisis. They shared their experiences with iFAST INSIGHT.

iFAST : What was this crisis about? How was your portfolio impacted then?SHeRlyn cHuA (Sc): When the SARS crisis first took place in early 2003, it was an unprecedented health crisis. Within just two months of the SARS outbreak, a large part of the world was affected and this significantly impacted lives and businesses with implications globally and domestically. At that point in time, it was frequently referred to as the most serious issue facing the region since the Asian financial crisis. Because of the sudden occurrence of this contagious health crisis, people were fearful when investing, due to their lack of information.

In 2003, my personal portfolio was mainly invested into investment-linked funds and I only held a few stocks. They were mainly invested only a few years prior to the crisis and they were down by an average of 20% when the SARS crisis happened. Even though the investments were doing badly, I remember I was not perturbed as I had no urgent need for the money.

JeSSicA koH (Jk): This crisis was about a loss in confi-dence in one’s health and not knowing what would happen the next day. Anybody could have been the next victim and lost their lives. Because of this, the economy virtually came

to a standstill. Few people visited restaurants, shopping malls and cinemas etc., few people dared to travel. Business activity plunged.

Because of the freeze in the economy and the recession that followed, portfolio values plunged, because many of the businesses I was invested in were badly affected.

iFAST: What are some of the mistakes you made (or other people you know made) as a result of this crisis?Sc: Somehow, we have this natural herd instinct inherent in each and every one of us. Most people are worried about the widespread consequences of the contagious SARS and fearful of what’s going to happen in the event that the virus cannot be contained; not many people saw opportunities in the midst of the crisis and dared to have a contrarian view.

Personally, I remember having had a discussion with my colleagues about how low the Straits Times Index had dropped to at that time, averaging around 1300 points and that it was probably an opportune time to invest. However, this was purely talk and none of us acted on it at that time. I simply held on to my investments, and essentially failed to seize the opportunity to make important buying decisions. I think the greatest mistake was to be overly worried about the severity of the crisis; therefore I allowed the short-term crisis to inhibit me from investing as I should for long-term goals.

I also recall that I had a client who purchased a whole life investment-linked plan from me two years prior to the SARS crisis. While such plans are meant to provide life coverage, they also accumulate investment units over the long term. Because of the SARS crisis, he changed his mind about keeping the investment-linked plan for fear of the future investment cash value being affected by the crisis. That was really unfounded fear and the early termination resulted in a painful loss of both coverage and cash value.

Jk: Some people panicked and pulled out their funds, at what turned out on hindsight to be the market bottom. Some people had surplus funds in the bank but did not invest for fear that prices would plunge further. Nobody knew when it was going to end, or, in the first place, whether it would end, or was it the end of the world? When markets started to pick up slowly, many were sceptical. By the time they started investing again, prices had already moved up substantially and they did not get to take part in a large portion of the rally that ensued.

THE SARS CRISISWHEN FACED WITH A CRISIS...

Jessica KohSherlyn Chua




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➝iFAST: What did you learn from this crisis?Sc: There will always be opportunities in times of crisis. Hu-man nature and the world will not change much. I remember hearing the story of a friend who actually believed so much in the potential of investing during crisis that he went to borrow money from friends so that he could purchase more in the stock market during the SARS crisis. I heard that he made loads when the economy recovered within a short period of time. Of course I do not advocate borrowing to invest, es-pecially from a speculative point of view. Nonetheless this friend’s risk-seeking attitude reminds me that there are invest-ment opportunities in crisis while conservatism and the fail-ure to act will never result in good returns.

Jk: I learnt that no matter how bad things get, each crisis will eventually blow over. The only question is when. The most important thing I learnt is to keep a cool head regardless of what the media says. In fact, I learnt to be a little contrarian – when the newspaper front pages are full of gloomy news, jobs were being lost, prices are at big bargains and it would be wise to invest even if all your friends say you are crazy to do so at such a time.

iFAST: How has this crisis helped you to plan your clients’ portfolios better in 2008?Sc: When the global financial crisis happened in 2008, it was

similarly a crisis that many were not prepared for. Naturally, people fall into the fear of the unknown - it was more than a financial crisis, it was also a psychological and confidence crisis. The severity of the financial tsunami and the speed at which events developed was way beyond even the expectations of Wall Street geniuses. As a financial consultant, I cannot per-form miracles for client’s portfolios which have fallen into the red, but I believe in helping them see “RED” in a different light – Reassure, Educate and Direction. I will meet my clients to review their existing portfolio and ensure that the level of risk is still within their level of tolerance and if not, we will make changes accordingly.

I also provide them with latest market news if they do not have the time to follow, and educate them of the developments in the market and why certain events lead to certain conse-quences. Finally, I remind them to focus on their long term goals again and provide the direction that they should stick to and not be distracted by the recent spikes of events that may cause them to take a detour.

Jk: I have learnt to keep my cool and transmit calmness to them. For the braver ones, provided they are comfortable and prepared for the potential volatility, they increased their alloca-tion to equities.

After seeing a few crises including SARS, I noticed that there are always people who say “this time it’s different”, this crisis is different, equities will never ever recover, or take 10 or 20 years, to recover, etc. Yes, each crisis is different in the sense that the causes of each crisis are different. However, human behaviour that drives markets always repeats itself. It is not the end of the world. If it’s really the end of the world anyway, even if you have all the money in the world, you would have no use for it!

iFAST: What are your tips to investors on how investors should face 2009?Sc: The financial markets for year 2009 will continue to be challenging and shall present both upside and downside sur-prises. From an investor’s point of view, I think it is difficult to expect any short-term gains. Even if there are any bear market rallies, they are very difficult to take advantage of as the up-ward trend should be fast and furious, yet short-lived.

I see 2009 as a year of consolidation of government ef-forts in all major economies and all these policy actions will eventually bear fruit; markets will start to recognize this and react accordingly. And if human nature stays constant and the world continues to run the way it had in past decades, this must truly be one of the best times to be a value stock accumula-tor. I would continue to build up on my investments over this year, diversify across the different regions and asset classes, and hopefully look back 5 to 10 years down the road to see that I have made some good investment decisions which had posi-tioned me well for retirement in time to come.

The truth is that investment concepts are often boring and simple, but only a handful of investors consistently practise them.



WHEN FACED WITH A CRISIS...

Continue to invest surplus funds after doing the above. •If you have been investing regularly using the dollar cost averaging method, don’t stop. By stopping, you would have missed the opportunity to take advantage of the lower prices to position your portfolio favour-ably to benefit from the upturn. At the point in time, it may look like you’re throwing good money after bad, but invariably, when markets recover, you will benefit much more.

don’t:Rush into liquidating your investments just because •you start to see losses. Reassess why the investment was done in the first place.Make impulsive buying decisions, investing in huge •lump sums.Be paralyzed by the market volatility and turn overly •defensive by keeping all money in cash. Cash may not be king.Be led by emotions when making investment deci-•sions.Invest based on rumours, speak to the right person •whom you can trust for advice.Expect your adviser to perform miracles. We don’t con-•trol the market and it is impossible to time the market. We are financial consultants, not financial magicians. Provided proper asset allocation has been done, your portfolio will recover in time to come. the main ques-tion you should be asking is, whether your portfolio is in a proper asset allocation. this determines whether it will recover along with markets (if properly allocated), or simply never recover even after a long time (like peo-ple who put all their money into technology funds in the late 1990’s).Hang onto parts of your portfolio that don’t have good •fundamentals, hoping that it will eventually recover to the price at which you bought it. Better to look for-ward rather than backwards – be ruthless and replace it with investments that have better potential moving forward.over-commit. Invest only funds that you don’t need for •at least 3 to 5 years.Forget your financial goals or give them up. during •times of crisis, it is even more imperative to stay fo-cused on what you want to achieve with your money in the long run and aim to achieve them in time, be it a happy retirement, your children’s education, that new apartment, or that round-the-world trip.

Source: Fin-eXiS adviSory Pte ltd

Jk: Dollar Cost Average – Instead of trying to time the mar-ket and find the bottom, which nobody is able to except by luck (even Warren Buffet says he can’t do it), put your money to work and over time, you will reap the benefits.

Have a long term perspective. Just like we do not use a ruler to measure a house, don’t be caught up with day to day movements of your portfolio, especially since for many of us, the funds are for retirement, which for many people, is 20 or 30 years away!

Do a spring cleaning of your portfolio. Remove things that have not much potential, move into things with more poten-tial. Again it is about ensuring that your portfolio is in a proper asset allocation, in order to benefit from subsequent recovery.

In short, a few basic investment principles remain tried and true: diversifying assets, taking a long term view, holding a steady course, and, most important, resisting the compelling urge to overact to the inevitable ups and downs of econom-ic cycles. These tenets have held true for centuries through similar crisis periods, and they will remain valid after order is restored to the markets. iFAST


Build up on cash reserves, both for the purpose of •meeting emergency needs as well as reserves that serve as an “opportunity fund”, which forms the ammuni-tion to invest when markets present good buying op-portunities. Ensure diversification across different asset classes and •maintain proper asset allocation based on individual risk appetite.Learn from history – markets have shown that they will •eventually recover from crisis.take advantage of market volatility by dollar cost av-•eraging.this may be a financial crisis but this is not the end of •the world. Instead of focusing on the losses sustained and be upset about it, maintain a grateful attitude and look for other things in our life to be thankful for.Plan your budget even more carefully. Plan for all ex-•pected expenses in the next 12 months.Set aside enough emergency funds of at least 6 months’ •living expenses and loan installments. Review your portfolio to ensure the asset allocation •(how your assets are allocated across different asset classes such as equities, bonds, alternatives, etc) is properly done and that your investments are well diver-sified. Research has shown that this contributes to over 90% of all portfolio returns.


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