Friday, 15 April 2016

Why I prefer not to have a recession

I liked my post on the net worth update but have to admit the method of calculation is almost always going to be up for debate. In my view, our net worth is an arbitrary figure to begin with and I am generally more concerned with the direction it is headed over time. As long as our net worth trends upwards positively with each month, I'm okay with that and the absolute figures don't matter to us as much.

Global Financial Crisis and European Debt Crisis

However, the net worth update post did get me thinking about whether our asset portfolio & income can withstand a recession given the liabilities & expenses we have. Although we graduated in 2009 right after the Global Financial Crisis of 2007/2008, we were able to find jobs in Australia eventually and there was minimal impact on a very small investment portfolio. The European Debt Crisis of 2010/2011 had more impact on a then slightly bigger investment portfolio compared to 2009. However, it didn't impact Australia's economy as much and we were able to retain our jobs.

Overall, the resulting recessions from the Global Financial Crisis and European Debt Crisis did impact our jobs and might have slowed our career and salary progressions. However, we were young with no debt obligations and other than not taking the opportunities to grow our investment portfolio, there was minimal impact to our assets. We also had sufficient income to manage our expenses with savings leftover and life went on.
Oil Crisis

Now that our assets, liabilities, income and expenses have grown over time, I have no way of knowing how well we can withstand a crisis and recession. You could argue that we are now in the middle of an Oil Crisis of 2015/2016. Given how the MAS unexpectedly eased its monetary policy to try to jumpstart growth in Singapore, the risk of a recession has probably already increased to warrant such an action.

Preparation for a recession

Not like it matters or will change anything but I prefer not to have a recession. Every time it happens, I have come to realise that the main risk is to our jobs and salary income i.e. cash flow. Although our asset portfolio has increased significantly, the dividend & interest income is no where near replacing our salary income.

We have taken action to prepare for a possible recession by increasing our cash on hand and to hedge against the event of job loss. We have also increased the cash component of our investment portfolio to allow us to take advantage of falls in the stock market and maybe even the property market.  We have cash holdings in Australia that we don't disclose on this blog and even in our Google Sheet. This is our lifeline cash funds - not for emergency or spending. It's for starting a new life in Australia if we don't make it in Singapore. Now you know how seriously we take the threat of a recession.

Are we ready for a recession?

Despite preparing for a recession, I don't actually know what will happen if it occurs and how severe it will be. What I have come to realise is that when something bad happens, everything else can go south at once. There are many things I have learnt from reading personal finance blogs in other countries. This Canadian blogger (Bridget Eastgaard at Money After Graduation) has a great post on the things she has learnt from Alberta's recession. It seems like the Oil Crisis of 2015/2016 has already caused a recession in other countries like Canada. Go have a read about what's it like to be in a recession and the far-reaching impacts it can have.

A recession can be an opportunity if you prepare for it. The way we have done it is to reduce our liabilities, increase the bond component of our investment portfolio and raise our cash holdings. I don't see how we can recession-proof the equity component of our investment portfolio other than to accumulate more ETFs and shares if it happens.

This still doesn't mean I would like a recession to occur. I can see how everything can go wrong at once e.g. being laid off without salary income, watching our stock portfolio & property values freefall and still have to deal with monthly expenses. Don't underestimate how long you can be out of a job and running out of money while losing everything it took years to build might be something you never fully recover from. The big problem with a crisis and recession is how the after effects can structurally change a country's economy. This can present a significant risk even in the recovery because can you be sure you won't be left behind?

It's easy enough to convince ourselves that my wife and I are still relatively young and can recover from a recession even if it is severe. We have done some stress testing of our net worth and cash flow under various scenarios to see how we can survive a recession.

I have come to realise that we are underestimating our reliance on the salary income from our jobs to manage our expenses. Even with our increased cash holdings, drawing them down to manage our expenses without any inflow of cash from salary income is going to hurt. This is not forgetting our dividend & interest income will go down as well due to dividend cuts and us no longer meeting the bank account requirements to earn the higher interest. Coupled with declining investment portfolio and property values, this is going to send our net worth down the drain no matter how we calculate it.

Ultimately, we will only know whether we are ready when it happens. We have gone through enough while working & living in Australia to know we can depend on each other in bad times. Our next big test will come soon enough and we are as ready as we can ever be.

4 comments:

  1. Hi Finance Smith

    Thanks for sharing your thoughts. I am a bit of a silent reader who is a Singaporean working in Australia. You mentioned in this post that you have cash holdings in Australia. Just be mindful of the "unclaimed money laws" in Australia.

    http://asic.gov.au/regulatory-resources/financial-services/unclaimed-money/changes-to-the-commonwealth-unclaimed-money-laws/

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    1. Hi,

      Thanks for the reminder! We try to go back to Australia every year to visit our friends and the spending is from the cash holdings in the bank accounts. It's okay so far but we will definitely keep the unclaimed money laws in mind.

      Cheers,
      TFS

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  2. Market cycles and economic cycles always happen. We must be prepared and strive to survive over them.

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    1. Agreed! We do the necessary preparation to be ready to survive these down cycles and try to capitalise on any opportunities that may arise.

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