Guru Speak

 Amid the financial turbulence that started somewhere thousands of kilometres away, we are feeling the heat here expanding from a stockmarket crash to production cutbacks. This time, it is different from the Tom Yum Kung crisis that originated in Thailand 10 years ago.

In 1997, we saw a supply crash due to the unbearable cost of debt and overleveraging after changing the currency exchange regime. Once we fixed our own debtstructure problems and recapitalised the banking industry, gradually the economy resumed its function.

However, this time, for us, it is a kind of demand crash. In addition to a nosediving drop in global stock markets, we have one of the worst recessions in the US economy, and probably other countries too, upcoming or under way, causing our main markets to import less of what we produce. Rising unemployment and falling consumer confidence are inevitable.

This crisis will certainly impact the way we live. Profit on our investment portfolio is gone, so are our vacation trips abroad. Fine dining will be less frequent. We may use the existing car for a little longer and postpone our decision to buy a new home for the time being. Should we have debt and depend on capital gains or dividends to service it, we will need to turn to our monthly income, or unwinding the investment position (which has already deteriorated) to repay such obligations. Even worse, our jobs may become increasingly insecure as our employers' businesses are hit.

As individuals, a wellthought plan with orderly prompt action can help guide us out of an unthinkable personal catastrophe. Firstly, we need to manage our debt position, if any, properly in order to minimise interest and fee charges.

Anything outstanding on credit card and personal credit lines incurs the highest interest and should be reduced as soon as possible. In addition, we should avoid the habit of consume now, pay later to prevent us from overspending.

Second, we should review our expense outlay and axe unnecessary or luxurious items. If you don't know where to start, look at your creditcard statement and see where you spend. Shopping, fine dining, entertainment and longtrip vacations are good candidates for being limited and controlled.

Third, we should look at our liquidity on hand: whether we have enough, and is it in the right place? Typically, we should have a cash reserve equivalent to three to six months' expenses. However, in time of uncertainty, especially for those whose jobs are likely to be impacted by the economic downturn, we may need to add a little more liquidity, probably up to six to nine months' expenses. In addition, we need to ensure that we park our cash where we have access once needed. In other words, we may consider keeping it in bank accounts or moneymarket funds, where liquidity is high and risk is low.

Fourth, we should review our insurance protection, for both our lives and our assets. There are some incidents that rarely incur, but when they do, they are costly. In good times, it may not matter so much about these expenses as we may have several means to pay for them. Protection may include health insurance (since the welfare benefit provided by employers may not be available when we need it), accident protection and property protection (both for fire and robbery).

Last, but not least, as I mentioned in this article last month, we should continue investing in retirement mutual funds and longterm equity funds up to our financial capacity. Tax savings mean more cash in reserve for other purposes. Should you still be afraid of investing more in stocks, there are various RMFs and LTFs that structurally limit exposure to equities.