Bottoming out? Not so fast...

By Patrick Tan

There has been talk of late, that the global recession is “bottoming out”. But if history has taught us anything, the road ahead looks set to be bumpy still.

The current meltdown has been described as the worst financial crisis since the Great Depression. Let us look then at the very period that today’s crisis is being compared to. When the American stock market crashed on October 29, 1929 (a day which has come to be known as Black Tuesday), it pulled the rest of the world down with it; much like what is happening today. Between 1929 and 1932 there were no less than six market rallies which were believed to by analysts then to be recoveries. Alas, each of those perceived “recoveries” were false starts. Today’s economists, with the benefit of hindsight, believe that true and sustainable recovery began only the following year, in 1933. In all, it took five years for the Great Depression to truly bottom out. Therefore, if history is a guide, talk about the current crisis bottoming out now is, to my mind, naively premature.

Plagued by balance sheet crises, stratospheric debt, credit strangulation and plummeting property values, pandemonium still reigns in the American market. It will continue for some time yet. While the Asian economies are expected to recover slightly before the American market, they too will take some time to struggle out of the doldrums. In the meantime, investors should be prepared to see more peaks and valleys in the months ahead. But we serious investors should remember Franklin Roosevelt - who, incidentally, was the president credited with helping the American economy recover from the Great Depression - who said that “we have nothing to fear but fear itself.”

Indeed, fear - and greed - drives the actions of market speculators who influence the market with their knee-jerk reactions and wild gambles. Investors, on the other hand, have time-honoured strategies that will see them through this period. They, on the whole, will emerge from this turmoil in better shape than the speculators.

Hold on with faith to the financial plan that you and your adviser have devised together. If you are currently allocating a portion of your income to your investment plan, continue with it. The practices of dollar cost averaging and value cost averaging are tried and true. Study after study has shown that adherence to these strategies will stand a disciplined investor in better stead than one who pulls out when times are bad.

The financial plan that our clients have are individually-crafted and take into account factors such as their goals, investment horizons, psychological propensity, financial capacity and current economic condition. It is precisely when times are bad that we need the discipline to adhere to our plans. Stay true to it and it will stay true to you. Your plan is the shock absorber that will help your finances withstand the bumpy ride ahead.

Patrick Tan is the founder and Partner of JNP Group. He is also serves as a Director on IPP's Board of Directors.