Rob Stock

The Dominion Post - - Business -

The spec­tre of a sec­ond global fi­nan­cial cri­sis haunts in­vestors. UK an­a­lyst Ann Pet­ti­for, who pre­dicted the first GFC, was in New Zealand this month, pre­dict­ing a se­quel.

The foun­da­tion of her fears is that a mega-cri­sis fol­low­ing the GFC in 2007-2009 was averted only when a mas­sive amount of debt was cre­ated.

She be­lieves an­other GFC is due, and this time cen­tral banks’ box of tricks is empty.

Her chill­ing pre­dic­tion raises ques­tions about whether house­holds can do any­thing to in­crease their fi­nan­cial re­silience in case Pet­ti­for is right.

When it comes to try­ing to win big on the wealth front by pre­dict­ing a fresh GFC, you have to not only be right about it hap­pen­ing, but you have to be right at the right time.

Any­one who thought a sec­ond GFC was nigh at the start of 2017 missed out on dou­ble-digit re­turns on many share funds, Jeff Matthews from Forsyth Barr said.

‘‘No­body rings a bell to say when it is time to sell, and when it is time to buy again,’’ he said.

Those who turned their backs on risky in­vest­ments like shares after the GFC had missed out on ‘‘nine phe­nom­e­nal years’’, Matthews said.

Pet­ti­for pro­vides a case in point. She re­called that a rel­a­tive bought a London flat in 2014. Pet­ti­for had been dead against it. Prices have since sky­rock­eted. Had the rel­a­tive fol­lowed her ad­vice, they’d be a deal poorer now, though the debt that funded the pur­chase is still there, she said.

New Zealand in­vest­ment ad­viser Louis Boulanger said it wasn’t pos­si­ble to pre­dict the ar­rival of the next global cri­sis.

‘‘You can’t. Ab­so­lutely,’’ he said.

Like Pet­ti­for, Boulanger did not be­lieve the cur­rent debt-fu­elled global eco­nomic sys­tem was sus­tain­able, but there was so much ma­nip­u­la­tion by politi­cians and cen­tral banks that it was any­body’s guess when the next cri­sis would come.

‘‘There are very few, if any, free mar­kets,’’ Boulanger said.

Many of the things or­di­nary house­holds can do to pre­pare to boost their fi­nan­cial re­silience are steps that take time to achieve.

These in­clude ag­gres­sively pay­ing down debt on the house­hold home, and build­ing up emer­gency cash sav­ings to call on in the event of an in­come earner be­com­ing un­em­ployed in a re­ces­sion.

But house­holds can act now to cut ex­penses.

In a fi­nan­cial cri­sis house­holds do tend to cut their spend­ing, show­ing it can be done.

First thing to go is spend­ing on big-ticket items such as cars, white­ware and home ren­o­va­tions.

The best time to cut ex­penses, how­ever, is in the good times, when dis­pos­able in­come can be used to max­i­mum wealth-build­ing ef­fect, en­abling both in­vest­ment and debt-re­duc­tion to build fam­ily fi­nan­cial sta­bil­ity.

Over the past four years, as many have pon­dered the like­li­hood of a GFC 2.0 emerg­ing, blog­gers, jour­nal­ists and money ex­perts have pub­lished lists of ways to pre­pare your fi­nances for the next big one.

One com­mon tip is for house­holds to build their emer­gency sav­ings.

In a global fi­nan­cial cri­sis eco­nomic ac­tiv­ity con­tracts, lead­ing to job losses. Hav­ing sav­ings means house­holds whose in­comes are dis­rupted can con­tinue to pay the bills for a time.

For those with in­vest­ments, it can mean some­thing else, too; not hav­ing to cash up in­vest­ments at a time when prices have fallen. An owner who can hold onto them is able to re­coup losses should there be a re­bound in prices when (if) the cri­sis abates.

Hav­ing cash avail­able also pro­vides an op­por­tu­nity. It can be spent buy­ing new in­vest­ments at bar­gain prices.

Matthews owns shares in renowned in­vestor War­ren Buf­fet’s Berk­shire Hath­away in­vest­ment com­pany. Fol­low­ing the GFC, their value plunged. Matthews did not sell. He ac­tu­ally bought more. The price re­cov­ered, and then raced away.

If or­di­nary peo­ple couldn’t pre­dict when a

GFC would ar­rive, and when it would abate, the sen­si­ble thing was to in­vest for the long term, and try to look through any cri­sis that emerged, Matthews be­lieved.

‘‘In the long-term peo­ple get re­warded for tak­ing risk,’’ he said.

Some fore­cast­ers were fore­cast­ing a global re­ces­sion in 2020.

If true, that would give house­holds the rest of the year to take steps to build their fi­nan­cial re­silience, but a longterm ap­proach would ar­gue that Ki­wiSavers who were still a long way from re­tire­ment should leave their money in growthori­ented funds. Tak­ing risk off the ta­ble was not al­ways straight­for­ward.

Shift­ing from a growth Ki­wiSaver fund into a con­ser­va­tive one re­duced ex­po­sure to shares, but con­ser­va­tive funds were heavy in bonds. Bonds tended to rise in price as in­ter­est rates fell, and lose value when in­ter­est rates were ris­ing, as they are now.

Hav­ing a long-term in­vest­ment plan helped ‘‘take the emo­tion’’ out of in­vest­ing, Matthews said.

Con­sumer debt car­ries an obli­ga­tion to re­pay the lender, re­gard­less of whether the bor­rower loses their job.

It can be a se­ri­ous bar­rier to cut­ting costs in a cri­sis.

Re­pay­ing debt in­creases a house­hold’s fi­nan­cial re­silience in a cri­sis.

It isn’t, how­ever, as im­por­tant as maintaining em­ploy­ment in­come through tough times, which means keeping skills up to date, and re­main­ing rel­e­vant at work, or in com­mand of a busi­ness able to weather an eco­nomic down­turn.

Credit in­sur­ance is costly, but can fund re­pay­ments should a bor­rower be made re­dun­dant.

Like con­sumer debt, mort­gage re­pay­ments are an obli­ga­tion that must be met, cri­sis or no cri­sis.

Tak­ing on debt in a boom, or the af­ter­math of a fi­nan­cial cri­sis, can re­sult in mas­sive wealth gains. All else be­ing equal, house­holds with lower mort­gages, and more equity, are more fi­nan­cially re­silient than those with higher debts, and less equity.

Boulanger be­lieved in­vestors should put some money aside ‘‘out­side the sys­tem’’, which he sees as un­sus­tain­able.

By that he meant in­vest­ing in gold and sil­ver bul­lion – the real stuff – not fi­nan­cial prom­ises linked to the pre­cious met­als.

Some might see own­ing gold as akin to tak­ing out in­sur­ance, but Boulanger be­lieved it made good long-term in­vest­ment sense along­side a more tra­di­tional in­vest­ment port­fo­lio.

Hold that gold, he ad­vised, and wait for its value to rise as the un­sus­tain­abil­ity of the cur­rent sys­tem was re­vealed in a cri­sis.

How much money to set aside (out­side the sys­tem) de­pended on client cir­cum­stances, needs, pref­er­ences and risk tol­er­ance, he said.

His ‘‘strategic ad­vice’’ to all clients is to main­tain two port­fo­lios: an in­vest­ment port­fo­lio, broadly al­lo­cated be­tween fi­nan­cial as­sets (shares, bonds, etc) and a sav­ing port­fo­lio of gold and sil­ver bul­lion bars held in in­sured stor­age.

PHOTO: 123RF

Ann Pet­ti­for

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