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Financial crises | The Economist

Restoring land for livelihoods, climate and economy. View: Modi gets real on the economy. IIFL picks bank stocks amid slowing economy. All rights reserved. For reprint rights: Times Syndication Service.

An economist explains what happens if there’s another financial crisis

Choose your reason below and click on the Report button. This will alert our moderators to take action. Get instant notifications from Economic Times Allow Not now You can switch off notifications anytime using browser settings. Personal Finance News. Ashok Leyland. Market Watch. Pinterest Reddit. ET Bureau. Getty Images. Bad news is infectious. As reports of job losses, slowing demand and the liquidity crisis trickled in last week, the stock markets slipped. But the suddenness of the decline has shaken the confidence of many investors. The discomfort is justified and prospects of an economic slowdown are only adding to the fears.


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These measures will help you tide over difficult times. It defeats the very purpose of the SIP by denying the investor the opportunity to accumulate more when prices are low. The concerns of investors are understandable. Data from mutual fund tracker Value Research shows that SIPs in two out of every five diversified equity funds started three years ago are in the red today. However, a downturn is the time when SIPs actually work to your advantage. A few years down the line when the market recovers, the accumulated units will translate into a huge corpus.

Historically, investors have gained by continuing SIPs through lean market phases and sticking around for the longer term see graphic. If you stop your SIPs during this period, you are likely to miss the opportunity to accumulate units at a lower cost; by the time you restart the SIP later, the market may already have run up. At the same time, experts insist that investors should moderate their return expectations in the near term. If your investing time horizon is limited to the next years, then expect modest returns at best. If the target goal for which you are investing is coming due in the coming years, then it would be best to withdraw the accumulated corpus or shift it to a liquid fund.

This way, you will protect the accumulated savings from the vagaries of the market. But if you have a five year plus investing time horizon, persisting with the SIP could yield healthy returns. In fact, investors in mid-cap funds should even consider hiking the SIP amount to take advantage of the sharp correction in the segment, suggest experts. Opt for less volatile funds In the prevailing market situation, hybrid funds are best placed to protect the downside for the investor.

Hybrid funds come in different flavours. Thus, these funds can swing towards either end of the asset spectrum to contain volatility. Balanced advantage funds also include some element of arbitrage through equity derivatives. Multi-asset funds, on the other hand, invest across equity, debt and gold in varying proportions, subject to a minimum for each segment.

These afford a higher degree of asset diversification under one umbrella.

2008–2011 Icelandic financial crisis

Another category of hybrid nature is equity savings funds. The rest is invested in fixed income avenues. The lower direct equity exposure makes the funds less volatile even as they benefit from equity taxation. Then there are the regular hybrid funds categorised as conservative, balanced and aggressive. These funds always maintain some minimum exposure to both equity and debt—higher debt bias in conservative, higher equity tilt in aggressive and evenly distributed in balanced.

Taxation can thus vary depending on the nature of exposure at the time of redemption. But even among similar hybrid funds, there is lot of variety since fund managers take varying degree of risk within each asset class. Experts recommend equity savings funds and balanced advantage funds over others in this space. Opt for less volatile funds Some hybrid funds have effectively cushioned the market downside.

Avoid investing in property Builders and housing finance companies are luring buyers with big discounts and low loan rates. The housing market in top Indian cities has not done too well in the past one year. Except in Hyderabad, residential prices in all big cities either fell or rose marginally see table. Given the looming threat of an economic slowdown, the situation is unlikely to improve in the next few quarters.

Builders are sitting on huge inventories which will take a long time to clear. In Mumbai and Bengaluru, it will take more than two years. Home prices have stagnated Slack demand, huge inventories and stringent regulations kept home prices low across India. If you are looking to buy for immediate use, go ahead and buy. But if you plan to invest in a second property, stay away for now. There are better options available which can provide higher returns.

This is especially true if you intend to take a loan to buy the property. Only the builder and the lender will gain, which explains why they are so keen to make you loosen your purse strings. Also read: Can you survive the economic slowdown? Take this quiz to find out 4. Diversify with gold, US funds It is always a good idea to diversify the portfolio to reduce the risk. During times of uncertainty, investors tend to flock to the safety of gold—this is evident in the sharp rise in price of gold in recent months. Investors who had taken some gold exposure would have been partly cushioned from the recent slump in the equity market.

However, avoid buying physical gold ornaments or bullion because the making charges eat into the returns and issues such as safety, liquidity and purity. When investing in gold, go for financial assets such as gold ETF or gold sovereign bonds.

Identify your stress points

These allow investors to purchase gold in denominations as low as 1 gram while affording high degree of convenience and safety. Another way to diversify the portfolio is by investing in international equities, particularly US stocks. US-focused equity funds provide two main benefits: One, they lend geographical diversification by investing in another country whose market has little correlation to the domestic market.

Further, they provide currency diversification. Investments in US-focused equity funds are dollar denominated, even though you invest and redeem in rupees. As the local currency has the propensity to depreciate against the dollar over the long term, this gets added to the actual NAV return of the fund.

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Diversify your portfolio US-focused funds have provided healthy diversification to Indian equities. Source: Value Research Data as on 19 Aug 5. Create an emergency corpus With jobs vanishing, an emergency fund is critical. Today, I'm 41 and she's 38, and we now have a month-old baby boy who we both take care of full-time because we live entirely off our passive income. Sooner or later, most people will become miserable doing whatever it is they do for a living. The key is to foresee your misery so that by the time you are actually sick and tired of your job, you'll already have the financial cushion to make that change.

For me, the biggest upside to working long and stressful hours straight out of college was recognizing very quickly I could not last in such an environment for decades. Therefore, I cut costs to a minimum, saved every other paycheck and percent of each year-end bonus, and invested in as many passive income assets as possible for 13 straight years. At the time of my departure in , I was a year-old executive director who had accumulated four years worth of deferred compensation in the form of cash and stock.

As part of my severance, I was able to keep all my deferred cash and stock compensation, get paid three months of federally mandated WARN Act pay, receive six months of fully paid healthcare, and receive a six-figure lump sum severance check. Without a severance, I wouldn't have had the guts to leave my job so early. But the severance effectively bought me six years worth of my life back. Given that time is priceless, I figured why not take the leap of faith.

If money started getting tight, I could always get a job again. When I left my job, not only did I have regular income coming in as part of my deferred compensation, I also had passive income that would help tide me over should my employer decide to renege on my severance. After all, my severance was to be disbursed over a period of five years and, during this period, the company could change its mind or go bankrupt.

In , my passive income consisted of CD interest income, dividend income from stocks, and rental property income from a two bedroom condominium I bought in I had a large amount of CD income because long-term CDs back then were paying But once I was able to experience freedom, it made all these sacrifices worth it. Start your passive income journey as soon as possible because it takes a long time to build something significant. If you're able to retire early, please don't waste all your free time slacking off. Sure, go travel around the world for several months, play tennis in the middle of the day and take a siesta after a particularly hearty meal.

Get it all out of your system. Eventually, you'll want to get back to work doing something you love to do. If you have a severance and some passive income, you can afford to take lower paying jobs that may pique your curiosity. For me, after my first year of freedom, I decided to consult part-time at several financial technology startups in the San Francisco Bay Area for about hours a week at each start-up over different time periods. There I built online marketing know-how and new connections for my true love: connecting with people online through my personal finance site, Financial Samurai.

Ever since I was 12, I have been writing to pen-pals from across the world. I started Financial Samurai during the depths of the financial crisis in after I had lost about 40 percent of my net worth in a matter of six short months. It was cathartic to connect with others around the internet who had also been devastated by the crisis.

Once I left work, using my newly acquired free time, I began to regularly publish new articles three times a week. The topics ranged from investing in real estate to discussing international equities to highlighting other severance negotiation case studies in order to retire early.

It turns out that if you regularly work on something for years, good things happen.

Money Tips From the Bible

After almost 10 years, Financial Samurai not only continues to be my favorite hobby, it also generates some supplemental income to help us continue building more passive income in order to remain free. A couple of years after I engineered my layoff, I suggested my wife do the same. She is three years younger.


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  8. We agreed that if everything worked out on my end, by the time she turned 34, she too, could leave her day job. Life is so much better spending it with someone you love. After nine years of working at the same old job, she was getting tired of all the office politics and the occasional difficult client. She had recently been passed over unfairly for a raise and promotion.

    As a result, she no longer had any motivation to continue. She wanted out. Fortunately, six months later she got her promotion and began taking steps to figure out her exit. For our combined sense of security, it was nice to have my wife's steady income. Getting on her company's health insurance plan was also a great benefit.

    But after two years, we had built up more passive income and felt pretty certain that both of us wouldn't need to work if we negotiated a severance for her as well. Painful, I know. In the end, my wife was able to get a really unique severance package that allowed her to work two days a week for the same pay for five months during her transition out.