Thursday, November 13, 2008

A healthy state of mind?

Hong Kong share prices have fallen by over 50% from their highs, property prices have come back at least 20% (more at the luxury end of the market), people are being laid off, just about every piece of financial news is negative and both the experts and the amateurs alike are generally expecting things to get worse before they get better.

At a more personal level, our household net worth has fallen by about 19% from its peak (our biggest asset class is leveraged Hong Kong real estate), my income has fallen by more than 20% from its peak, we are carrying quite a lot of debt and our household expenses have risen (primarily due to our younger child starting school).

I should be lamenting the losses, kicking myself for not selling at the highs and worrying about the future. I find that I am doing none of these things. So why do I not feel worried about the future or upset about the losses:

1. even though my income has fallen by 20%, it is still considerably higher than our expenses. We are accumulating cash each month and have two incomes;

2. while our properties have declined in value, all but one (possibly two) are worth more than we paid for them, all have positive equity and collectively they are generating a positive cash flow each month and the p+i mortgages are being amortised a little bit each month;

3. I have been through two previous serious economic downturns and survived both. The keys to getting through are in part maintaining a positive cash flow, letting go of losing investments which do not have a serious prospect of recovering and building a cash reserve;

4. recognising that the opportunities that recessions generate later on will more than make up for the pain experienced during the down side of the cycle. The cash reserve that we are building up will fund future investments at (hopefully) very attractive prices;

5. sure I have made several loss making investments but it could have been a lot worse. I could have been one of the buyers of Lehman mini-bonds, speculated heavily in derivatives or have invested in shares on margin. Things could be a lot worse.

Maybe I am simply too optimistic? Or it may be that I am simply benefiting from having managed my personal finances prudently for several years.

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