As someone who is old enough to have experienced both the 1987 share market crash, the recession which followed the 1987 crash and the Asian crisis, I was more amused than bewildered to see the media describing yesterday's downturn in a number of markets as a "crash". It was nothing of the kind. Of course, I have no idea what will follow and cannot rule out the possibility of a much larger downward movement that may, in due course, merit being called a "crash".
As far as my personal financial planning is concerned, I would view the possibility of a large fall in asset values and a recession as follows:
1. liquidity: the world is awash with liquidity. The fact that central banks have been talking so much about tightening liquidity (with very few actually doing anything about it) is itself evidence of the amount of liquidity available. Central banks may use liquidity measures to deflate a bubble, but they are very unlikely to use them to promote a recession. All that money has to go somewhere and I would expect it will eventually flow back into investment assets (stocks, bonds, real estate etc). The question will be "when?";
2. inflation: inflation is still with us. Unless something happens to shift to a deflationary environment, cash remains a losing investment in real terms. The South China Morning Post ran an article about having negative real interest rates on deposits and the expectation that this would lead to a surge in property prices;
3. opportunity: I am a net accumulator of assets (and hope to remain so all my life). Last year it was difficult to find assets that met my investment criteria. The Hong Kong property market has firmed over the last few months (and the lower interest rates have contributed to this) making it even harder. Any reduction in values/pricing will provide opportunities to acquire assets at more attractive valuations;
4. debt management: a weaker economy significantly reduces the risk of increases in interest rates. It may or may not effect rent levels, but with only two properties with leases due to expire before 2008, I am not overly concerned about being able to service my mortgage obligations. Of greater concern would be banks tightening their lending criteria which may affect my ability to make further acquisitions;
5. job security: I consider my job to be quite secure. My income may suffer if there is a downturn, but I have few concerns about losing my position. Worst case, I will get several months notice and a pay out large enough to pay the bills for several more months. Mrs traineeinvestor's position is less secure, but we can get by on one reduced income if we have to;
6. work life balance: for the last three years my work life balance has been unbalanced. A softer economy is likely to result in lower income but will offer the benefit of shorter working hours. I would welcome this;
7. net worth: if asset values go down my net worth will go down with it. Although painful in the short term, it is just that: short term. In the longer term, for the reasons given above a recession is something that will offer more opportunities than threats to my financial plan.