Recession: What Does It Mean To Investors?

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle
In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.


Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion
Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.

The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

1. Employment
2. Personal income
3. Sales volume in manufacturing and retail sectors
4. Industrial production

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion.

The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?
Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money. Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion
The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

Source: http://www.investopedia.com

Market Statistic

12 prinsip kekayaan

Ramai orang yang tidak perasan bahawa orang kaya tidak seperti orang biasa.

Mereka mempunyai prinsip hidup yang mudah tetapi sukar dicapai oleh orang biasa. Mereka sanggup bersusah susah dahulu sebelum mencapai kesenangan pada masa akan datang.

Mereka merupakan seorang yang penjimat dan suka menyimpan. Kebanyakkan daripada mereka mempunyai matlamat yang jelas; mereka tahu dengan tepat berapa banyak yang mereka mahukan dan berapa lama ianya boleh dicapai. Orang kaya tahu RM1000 yang disimpan pada hari ini boleh membesar sepanjang hidup mereka.

Di sini saya membongkar 12 prinsip kekayaan yang boleh anda ikut:

1. Mereka rancangkan kejayaan mereka. Mereka menyematkan matlamat berapakah pendapatan yang diperlukan, mereka tahu berapa banyak yang perlu disimpan dibank setiap tahun, dan mereka tahu berapa banyak modal yang diperlukan untuk persaraan. Adalah satu kemestian bahawa jumlah tersebut ditulis dengan jelas, kerana ia menjadi asas untuk tindakan. Dengan memberi tumpuan kepada matlamat sekarang tidak akan menjejaskan jika terdapat sebarang halangan.

2. Mereka merancang dan bertindak. Mereka membuat satu simpanan tetap dan terus menyimpan setiap bulan tanpa henti.

3. Orang kaya mempunyai disiplin. Mereka bertindak mengikut rancangan matlamat dan mengelakkan mengambil wang dari simpanan persaraan. Mereka tahu mengambil wang dari simpanan persaraan seperti “mencuri” daripada masa depan mereka.

4. Mereka membuat perlindungan daripada bencana. Ini bermakna mereka mengambil insuran untuk melindungi diri daripada kehilangan aset penting seperti rumah atau kereta. Mereka juga mengambil insuran perlindungan diri sebagai persediaan jika terjadi sebarang bencana keatas diri sendiri.

5. Mereka cuba mengelakkan hutang. Seorang pengurus kewangan yang bijak cuba untuk mengelakkan hutang dan membayar dengan lebih awal jika boleh.

6. Mereka menjadikan pendapatan sementara kepada tetap dengan menyimpan dengan bijak.

7. Mereka berjimat keatas setiap ringgit yang dibelanjakan.

8. Mereka benci berbelanja.

9. Mereka sukakan menyimpan. Mereka tahu setiap wang yang disimpan akan memberikan hasil yang lumayan pada masa depan.

10. Mereka terus belajar daripada guru-guru yang sudah berjaya, oleh itu mereka akan lebih berjaya.

11. Mereka mempunyai sikap positif tentang wang. Mereka bukan seorang yang tamak atau menjadi hamba kepada duit sehingga melupakan tanggungjawab kepada Tuhan.

12. Mereka selalu mencari peluang untuk membuat wang dan menyimpan sebanyak yang boleh.

kredit to nizam (my mailbox spammer)

Stay calm during market turbulence

In the wake of the turbulence of stock markets in recent months, unit trust investors may be tempted to either sell or buy. However, investors are advised to remain calm and practice dollar cost averaging with their long-term goals in view.

When regional and global markets succumbed to panic selling in August 2007 and more recently in June 2008, the severity and sharpness of the correction was large enough to make unit trust investors ask themselves whether they should redeem now to stem further losses or buy more units at currently low prices. In fact, if they practise dollar cost averaging, they need not concern themselves with these timing issues. Dollar cost averaging enables investors to automatically buy more units when prices fall and fewer units when prices rise.

It is especially during times of market volatility that individual investors should remain focused on their long-term investment goals and keep their emotions from influencing their investment decisions. A disciplined and methodical approach to investing is the key to long-term investment success.

Unit trust investors are advised to buy and hold their investments for the medium to long term. The buy-and-hold principle is based on the notion that a good investment will generate reasonably attractive returns over the medium to long term. This also means that investors are able to distinguish between daily movements in the market and the underlying long-term value of their investments. Professional fund managers buy and hold for the medium to long term as they are prepared to wait patiently over several years for their investments to reach their intrinsic or fair values. For the unit trust investor, the 'buy-and-hold' strategy can also be applied by holding on to a well-selected unit trust fund over a period of at least three years.

There are some investors who believe they can achieve superior returns by timing the purchase and redemption of equity funds to profit from the stockmarket' s short-term movements. These investors are tempted to engage in timing the market especially in an environment where equity markets are volatile. Such investors who wish to make quick gains in the stock market by switching from one fund into another fund will often be disappointed. Market timing strategies that are often recommended by 'investment experts' have seldom been successful. This is because stock markets are inherently volatile and are impossible to predict with numerous factors, both domestic and foreign, affecting daily and weekly fluctuations in stock prices.

Investors who wish to take a more active approach with their investments by timing the market will expose themselves to many risks. In order to profit from the market's short-term trends, the investor has to correctly predict the market's trend and its turning points.

Public Mutual Funds

Public Aggressive Growth Fund (PAGF)
Public Asia Itikal Fund (PAIF)
Public Balanced Fund (PBF)
Public Bond Fund (PBOND)
Public China Ittikal Fund (PCIF)
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Public Enhanced Bond Fund (PEBF)
Public Equity Fund (PEF)
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Public Far-East Dividend Fund (PFEDF)
Public Far-East Property & Resorts Fund (PFEPRF)
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Public Islamic Balanced Fund (PIBF)
Public Islamic Bond Fund (PIBOND)
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Public Islamic Enhanced Bond Fund (PIEBF)
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Public Islamic Money Market Fund (PIMMF)
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Public Islamic Sector Select Fund (PISSF)
Public Islamic Select Bond Fund (PISBF)
Public Islamic Select Treasures Fund (PISTF)
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Public Money Market Fund (PMMF)
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