Financial Planning

There is no doubt that the declines in housing prices and stock market prices are a serious matter and that people will be impacted in various ways as a function of circumstance or because of their own actions and the potential impact on the economy at large could be unpleasant.

While I believe the above to be true it is also true that many people will not be materially affected.

If you have a loan you can afford and you want to stay in your house it is likely that a drop in your home’s value won’t matter a whole lot if at all.

My friend bought a house and he can’t imagine he could sell it today for what he bought it for six months ago. All things considered he would of course hope that the value did not go down (I am assuming it price is down somewhat but I don’t know with any certainty) but he can afford the housing loan and will keep the house.

If three houses on your block each sold for $500,000 a year ago you might assume that is what your house is worth but if you did not try to sell you really don’t know. You can only know the value of your house when you and a buyer meet on price. What your house might have been worth a year ago really means nothing.

If you own a house that you want to stay in you don’t need to worry about the value today you just need to make your payment (if you have one) and fix things that need fixing.

Think about your stock portfolio or unit trust investments now. At the end of December 2007 the KLCI was at 1445. Let’s suppose that between now and the end of the quarter KLCI experience a slight gain to close at 1300. If that happened the KLCI would finish the quarter down 11%. A person whose only exposure is a unit trust with a 70/30 mix would likely be down less than 11% for the quarter. If this same person does not follow the market at all and only checks his unit trust balance once a quarter he might be totally oblivious to what a wild ride this quarter had been.

As unit trust funds are investments with 3 to 5 years time horizon, you should only be bothered about the market correction phase as this is a time to overweigh your equity funds. I would suggest that you keep investing as getting better lower pricing of the unit trust funds will enhance your portfolio. And ‘wah-lau-eh’, imagine when the market finally recovers, your returns will likely to exceed the average returns of 8% to 12% per annum.

If you have the proper asset allocation (this is crucial!) a bad year is unlikely to really have anything more than a psychological impact. All of the gloom and fear that this time could be different.

You don’t need to worry about stock prices you need to focus on having enough money when you need it in the future. That means a lot of saving and a couple of prudent decisions along the way.