FA ADVISORY NOTE
OCTOBER 15, 2008
The 2008 Global Financial Crisis:
The Wealth Rebuilding Strategy
FINANCIAL ALLIANCE PTE LTD
“But how do we know when irrational exuberance has unduly escalated asset values, which then
become subject to unexpected and prolonged contractions as they have in Japan over the past
decade?"
Alan Greenspan, former chairman of the Federal Reserve Board
If there is an opposite phrase to Greenspan’s infamous “irrational exuberance”, it must be “irrational despondency”, which probably best describes what we had experienced in the past few weeks, especially in
the first 9 trading sessions in October. During this period, the Dow Jones Industrial Index lost an incredible 22% of its value, leaving it 41% off the peak it hit a year ago on October 11, 2007 at 14,278. Globally,
few have been left unscathed. Over a period of 12 months, as of October 10, the MSCI World Index was
down 43%, MSCI Europe 45% & MSCI Asia exJapan 51%. The sharp rebound we have seen over
the past few days brings some much needed relief
although many will be asking whether this is yet
another dead cat bounce.
Time to Look Forward
Over the past one year we have experienced an
unprecedented period of wealth destruction which
has set back the financial plans of many investors.
But rather than look back on the past & lament on
what should have been done, investors must now
look ahead into the future & decide on how to put
these plans back on track.
This report will give an outline as to what we believe to be the various stages of recovery the market will undergo in the coming months (Chart 1) &
what are the strategies to adopt at each stage.
Chart 1: The Four Stages of Recovery
STOP— Strategy, Time, Opportunity, Patience
What investors, with the help of their financial consultants, must now start preparing is a wealth rebuilding strategy. Both investors & their consultants will have important roles to play as part of this strategy.
Investors must believe that, just as how it has taken wealth away, the market also provides the best opportunity to rebuild one’s wealth. After the psychological & financial battering that many investors have
taken, the majority may be looking to only minimize their losses, thereafter swearing off investing in the
markets. This will be self defeating as the focus of this group of investors will be to sell into rallies to cut
present losses, rather than to rebuild their wealth. Thus it is important to understand that remaining in the
market is critical.
Investors must also understand that time & patience are two very important virtues that are needed for
the overall strategy to succeed. Without these two virtues, investors will be easily cowed by short-term set
-backs, afraid that the market will once again take away whatever little they have regained.
The financial consultant’s key role is to work out a strategy, one which allows for the best opportunity for
the investor to rebuild his or her wealth. Based on our belief that the market will go through a few stages
during this recovery phase, the financial consultant will look to recommend different strategies to adopt
at each of these stages in order to maximize such opportunities.
THE 2008 GLOBAL FINANCIAL CRISIS:
THE WEALTH REBUILDING STRATEGY
Page 2
Markets Will Recover But What’s Your Strategy?
We don’t profess to know where the bottom lies or
how long this present decline in the markets will last.
However, we do know that markets will eventually
bottom out from this crash as it has from other crashes.
Some may wonder why we are making a statement of
fact. Of course markets always bottom out & recover.
The Dow bottomed out & recovered after the 1929
crash (which had led to the Great Depression) & also
after the 1937 Pre-World War 2 crash, two periods
which saw great uncertainty in the world. The Dow
also recovered after the 2002 Dot Com Bubble-cum9/11 crash, & so did Indonesia’s JKSE—one of the
worst hit— from the Asian crisis, to name a few (see
Charts 2 –5).
But the point we are trying to drive home is that it’s
never about whether markets will bottom & recover,
they always do. Thus, it’s more about whether one is
prepared for such an eventuality, whether an appropriate strategy is in place so that one’s portfolio can
benefit from this eventual bottoming out & recovery
(Chart 6).
Looking at previous crashes, markets undergo four
distinct stages after a crash & at every stage there will
be different strategies to adopt for investors to rebuild
their wealth. In the following paragraphs we will look
into these stages & the various strategies to adopt.
Stage 1: The Base Building Process.
This is where the market finds its footing & a bottom.
It normally, but not necessarily, involves a pattern
which has three distinct bottoms. All the crashes we
are referring to have such distinctive bottoms as indicated by the red curves on the various charts.
The key theme at this stage is to be in the market,
rather than on the sidelines. This is vital given that
when the Stage 2 rebound occurs, there will be little
time to jump back onto the bandwagon (i.e. once out
the “let’s wait for a pull-back” mentality will almost
certainly assure many will miss the ride).
Investors should look to enter the market using the
Dollar Cost Averaging method as picking a market
bottom is futile. Also, it is very important that one’s
portfolio is well diversified at this stage.
Diversification is important because one cannot be certain on whether markets will rebound uniformly i.e. Chart 2-4: Examples of bottoms & recoveries
some may underperform others. It would be naive to think that those which have fallen the most will be
the ones to rebound the most as fundamentals & perception have changed. For example, investors who
are narrowly focused on the U.S. will face the risk that part of the funds that have exited this market will
not necessarily go back there given an increasing belief that the U.S. economy is now heading into a
deeper & more prolonged recession relative to other regions. Similarly, fund managers may be more
wary of investing in markets where the authorities have in recent weeks completely shut down trading.
THE 2008 GLOBAL FINANCIAL CRISIS:
THE WEALTH REBUILDING STRATEGY
Page 3
Stage 2: The Rally from an Oversold Position
This stage involves a strong rally as the market recovers from a grossly oversold position. A lot of times,
the market discounts the worst case scenario (which we believe what is happening presently), only to realize that when the dust settles, things have been overdone.
One can build a case to say that the Fed, global central banks & governments have provided a massive
amount of stimulus into the system & have gone as far as explicitly saying that they would do whatever it
takes to turn sentiment around. For now, everything thrown at the market - from lower rates to massive
liquidity injections to outright bailouts—have failed due to the overwhelming crisis in confidence. But
when confidence does eventually return, there will be a sudden realization that with all the stimulus in
the system & valuations at that point, the markets would have grossly overshot to the downside. Ideally,
one should already be in the market by that time (with a well diversified portfolio) to take advantage of
the corresponding upswing.
Chart 5: Example of bottom & recovery
Chart 6: The four stages to unfold in months ahead
Stage 3: The Consolidation Process
This is where the market will likely trade sideways for a period of time as both households & corporate
rebuild their devastated balance sheets. During this period, focus will be on who will potentially emerge
from the present global slowdown/recession earlier to enter into a new expansion stage, that is, Stage 4.
This stage will likely see a tactical rebalancing of geographical allocations. One could make arguments to
favor allocation to Asian countries which are domestic orientated versus those which are highly dependent on global growth or tied specifically to growth in the U.S. & Europe; to countries where saving rates
are much higher as consumers balance sheets would be in much better shape to aid the recovery; to countries that are fiscally stronger & have large foreign reserves, both of which can be used to stimulate & aid
the economic recovery etc. Investors who have yet to should also look into alternative investments during
this period given the anticipated sideway performances of the stock market.
Our Commitment
We at Financial Alliance are committed to work together with you to rebuild your wealth & get your financial plans back on track. The road ahead will be a challenging one but we strongly believe that those
who prepare themselves well will reap the benefits as the market recovers.
This article is contributed by Mr Sani Hamid. Financial Alliance Pte Ltd is a licensed Financial Adviser and exempt General Insurance broker
regulated by the Monetary Authority of Singapore. We are licensed to provide financial planning and product advisory services. Please seek
the advice of professionals when reviewing and implementing your financial plan and evaluating financial products. The information contained in these pages is not intended to provide professional advice (whether financial, investment, insurance, tax, legal or otherwise).
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