244) Global Financial Crisis Effect on Equity & Bond Funds

244) Global Financial Crisis Effect on Equity & Bond Funds

Do you know what happened to the Stock Market and Bonds during the Global Financial Crisis (GFC) started from the USA Sub Prime Problem from Jan to Oct 2008? 

Do you wonder what happened to the markets after the Crisis was over?

Let's look at the details to learn lessons from the past.

Below is an example of Equity fund and the benchmark KLCI performance during GFC.

The GFC crisis happened from 11 Jan to 29 Oct 2008 for 292 days (around 10 months).
The Equity Fund dropped 45%, while KLCI also dropped 45%.

Now, let's look at the graph below of same fund after the crisis was over.

After the GFC crisis, the stock market increased from 29 Oct 2008 to 8 Jul 2011 for 982 days (2.7 years). The same Equity Fund increased 126%, while KLCI increased 92%.

Now, let's look at the graph below of combined total period from 11 Jan 2008 to 8 Jul 2011. It was the period of GFC start to end of the market growth.

The Equity fund dropped, rebound back and still gave 24% total returns, while KLCI gave only 5%.

Now, let's compare the performance of a Bond Fund.

During the GFC crisis, the Bond Fund also dropped 0.7%, while the 12 Months Fixed Deposit value increased 3%. Bond funds were affected by Foreign outflows and depreciation of the Local Currency.

Click here for more reading on factors that affect bond prices.

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

Now, let's look at the graph below of same fund after the GFC Crisis was over.

After the GFC crisis, the Bond Fund start to give positive returns 22%, while the 12 Months Fixed Deposit value increased another 7.7%.

Now, let's look at the graph below of combined total period from 11 Jan 2008 to 8 Jul 2011. It was the period of GFC start to end of the market growth.

The Bond Fund total increased 21.7%, while the 12 Months Fixed Deposit value increased 10.8%.

Comparison:

1) During GFC Crisis, the Equity Fund dropped 45%, while the Bond Fund dropped 0.7%.

2) After GFC Crisis, the Equity Fund increased 126%, while the Bond Fund increased only another 22%. The Equity Fund gave much higher returns than Bond Fund. An Investor who had invested at the lowest point would have made a very good return.

3) During & after GFC Crisis, the Equity Fund increased 24%, while the Bond Fund increased 10%. An investor that had bought just before GFC, stay invested until the Crisis was over and continued to stay invested would still made a some returns.

4) The Bond Fund continued to increase in value with more stable performance while the Equity Fund was more volatile with bigger ups and downs.

5) During Financial Crisis, Bond Funds are affected more than during virus crisis.

Conclusion:

1) Stay Invested for the Long Term until your financial objective is achieved.
2) Understand that Equity Fund is more volatile, so stay calm.
3) Equity Fund has Higher Volatility (Risk) vs Bond Fund. However, higher Risk gives higher Returns in the long term.
4) Diversify your portfolio to balance the Risk and Returns.


For more related articles:

246) Europe Debt Crisis Effect on Equity & Bond Funds

https://highlevelrules.blogspot.com/2020/04/246-europe-debt-crisis-effect-on-equity.html

242) SARS Crisis Effect on Equity & Bond Funds

https://highlevelrules.blogspot.com/2020/03/242-sars-crisis-effect-on-equity-bond.html

241) Factors Affect Bond Prices

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

227) Why You Should Think Twice Before Selling That Losing Unit Trust Funds
https://highlevelrules.blogspot.com/2019/06/227-why-you-should-think-twice-before.html

Trader vs Investor
http://highlevelrules.blogspot.com/2018/07/trader-vs-investor.html


Time In vs Timing the Market
http://highlevelrules.blogspot.com/2017/10/time-in-vs-timing-market_24.html


Price Top & Bottom Cycle
http://highlevelrules.blogspot.com/2018/08/price-top-bottom-cycle.html

243) Housing Loan Moratorium Calculator

243) Housing Loan Moratorium Calculator

You must had heard or read about the 6 months Moratorium on Loans by the Malaysia Government on 26 Mar 2020.

There had been few discussions on impact on the Housing Loans. If the bank still charge interest on delayed payments, the borrower will end up paying more and longer to complete the loan.

There are few banks that had reported NOT to charge interest on the delayed payments. However, other banks have yet to report their decisions.

The best scenario is to pay the loan repayments if you have the cash flow.

Do take advantage of the Moratorium if you can invest and get a higher return than your loan interest rate.

Or use the money to pay off the higher interest loans like Credit Card or Personal Loan.
There are 3 tables for the 3 types:
1) Normal loan
2) Moratorium 6 months with Non-Compound Interest (No Interest on interest)
3) Moratorium 6 months with Compound Interest (Interest on interest)

You can use this Excel file directly from here. Try to check and simulate different:

a) Loan Amount,
b) Interest Rate
c) Tenure
d) Payments

Double click on the Green Cells to change the parameter values.
Click on the bottom right most icon below to view the full size Excel Workbook.
You can also download the Microsoft Excel file by clicking he first icon on the bottom right.

 

It is recommended that you use a computer or notebook to download and edit. If you download using your mobile, most probably you cannot edit. Reason is because mobile apps are mostly only for VIEWING the file. Not to edit.

Do check that your Mobile Excel app can do the editing so that you can edit the numbers for your own loan.

You can unprotect the Excel file and edit the cells. You can change different interest rates and payments to calculate the changes to the loan repayment tenure.

To unprotect the sheet and edit the cells, the password is HLR.


More articles at:

Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

Money Market Fund vs Fixed Deposit.
http://highlevelrules.blogspot.com/2017/06/money-market-fund-vs-fixed-deposit.html

242) SARS Crisis Effect on Equity & Bond Funds

242) SARS Crisis Effect on Equity & Bond Funds

Do you know what happened to the Stock Market and Bonds during the SARS Crisis from Apr 2002 to Mar 2003? 
What happened after the Crisis was over?

Let's look at the details to learn lessons from the past.

Below is an example of Equity fund and the benchmark KLCI performance during SARS.

The SARS crisis happened from 23 Apr 2002 to 11 Mar 2003 for 322 days (less than 1 year).
The Equity Fund dropped 16%, while KLCI dropped 23%.

Now, let's look at the graph below of same fund after the crisis was over.

After the SARS crisis, the stock market increased from 11 Mar 2003 to 11 Jan 2008 for 1767 days (4.8 years).
The same Equity Fund increased 175%, while KLCI increased 144%.

Now, let's look at the graph below of combined period from 23 Apr 2002 to 11 Jan 2008. It was the period of SARS start to end of the market growth.

The Equity fund dropped, rebound back and still gave 131% returns, while KLCI gave 87%.

Now, let's compare the performance of a Bond Fund.

During the SARS crisis, the Bond Fund still increased 7%, while the 12 Months Fixed Deposit value increased 3.5%.

Now, let's look at the graph below of same fund after the SARS Crisis was over.

After the SARS crisis, the Bond Fund still increased another 33%, while the 12 Months Fixed Deposit value increased another 19% from 11 Mar 2003 to 11 Jan 2008 for 1767 days (4.8 years).

Now, let's look at the graph below of combined period from 23 Apr 2002 to 11 Jan 2008. It was the period of SARS start to end of stock market growth.

The Bond Fund total increased 43%, while the 12 Months Fixed Deposit value increased 23%.

Comparison:

1) During SARS Crisis, the Equity Fund dropped 16%, while the Bond Fund increased 7%.

2) After SARS Crisis, the Equity Fund increased 175%, while the Bond Fund increased only another 33%. The Equity Fund gave much higher returns than Bond Fund. An Investor who had invested at the lowest point would have made a very good return.

3) During & after SARS Crisis, the Equity Fund increased 131%, while the Bond Fund increased 43%. An investor that had bought just before SARS, stay invested until the Crisis was over and continued to stay invested would still made a good return.

4) The Bond Fund continued to increase in value with more stable performance while the Equity Fund was more volatile with bigger ups and downs.

Conclusion:

1) Stay Invested for the Long Term until your financial objective is achieved.
2) Understand that Equity Fund is more volatile, so stay calm.
3) Equity Fund has Higher Volatility (Risk) vs Bond Fund. However, higher Risk gives higher Returns in the long term.
4) Diversify your portfolio to balance the Risk and Returns.


For more related articles:

227) Why You Should Think Twice Before Selling That Losing Unit Trust Funds
https://highlevelrules.blogspot.com/2019/06/227-why-you-should-think-twice-before.html

Trader vs Investor
http://highlevelrules.blogspot.com/2018/07/trader-vs-investor.html


Time In vs Timing the Market
http://highlevelrules.blogspot.com/2017/10/time-in-vs-timing-market_24.html


Price Top & Bottom Cycle
http://highlevelrules.blogspot.com/2018/08/price-top-bottom-cycle.html

241) Factors Affect Bond Prices

241) Factors Affect Bond Prices

What are the Factors that affect Bond Prices?
There are many factors. Listed below are the main factors.

Main Factors:
1) Interest Rate
2) Inflation Rate
3) Bond Credit Rating
4) Bond Maturity Period
5) Currency Exchange Rate
6) Stock Market
7) Trader Strategy

1) Interest Rate

Investors will invest into investments that gives higher returns with lower risks. Bond Yields will compete with interest rates to attract investors. As bond pays fixed income, the bond price will change to change the bond yield.

When interest rate increases, bond yield also increases. This will cause bond price to drop.
When interest rate decreases, bond yield also decreases. This will cause bond price to rise.

For more info
http://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

2) Inflation Rate

When inflation increases, bond prices fall. When inflation decreases, bond prices rise. Rising inflation erodes the purchasing power of the Future money Value. When the bond pays future coupon payments and maturity par value, the return on the investment will be worth less in today’s Present Value.

FV = PV(1+i)^n

PV = FV/(1+i)^n

FV = Future Value

PV = Present Value

i = Interest Rate

n = period

when Interest Rate (i) increases, Bond Present Value (PV) reduces

3) Bond Credit Rating

Bonds are being rated by Rating Agencies. Basically, Rating Agencies give credit rating from Highest grade (AAA) to lowest grade (D). Higher rating means lower risk. Lower rating means higher risk.

When the rating is higher, the risk of bond default is lower. When a bond defaults, the investor may not get back his coupon payments and invested capital.

For more info
https://en.wikipedia.org/wiki/Bond_credit_rating

4) Bond Maturity Period

As bond price is affected by inflation rate and interest rate, longer term bonds will face more uncertainties compared to shorter term bonds. Therefore, longer term bonds give better coupon payment as the additional risk premium. Longer term Bond will have higher price fluctuation as a result of the longer period it takes to mature.
Below is the "see-saw" concept on the maturity period effect on bond price movement when there is a change in interest rate.

5) Currency Exchange Rate

When foreigners buy another country's asset, their currency is converted into the local currency. A depreciation of the local currency will lower the total returns in the foreign currency. Conversely, an appreciation of the local currency will increase the total returns in the foreign currency.

Current Rate: 

RM1.00 = USD0.250

USD1.00 = RM4.00

Buy Investment

Depreciated local Currency: 

Worth Less (Lower) value in USD

RM1.00 = USD0.222

USD1.00 = RM4.50

Appreciated local Currency: 

Worth More (Higher) value in USD

RM1.00 = USD0.286

USD1.00 = RM3.50

When the local currency is depreciating, the foreigners may sell the assets to cut their losses.

6) Stock Market

Bond prices are affected by stock market by competing for the investors' money. Bonds are safer than stocks, but they offer a lower return.

Stocks do well when the economy is booming. As a result, when stocks go up in value, bonds value go down.

When the economy slows, consumers buy less, corporate profits fall, and stock prices decline. That's when investors prefer the regular interest payments guaranteed by bonds. This will create more demand for bonds and increase the bond prices.

7) Bond Trader Strategy

Bonds are traded in the bond market. When the bond prices had increased, bond traders will sell their bonds to take profits and invest into something else that had fallen in price. 

Other Related Articles

239) Bond Specification & Calculation

https://highlevelrules.blogspot.com/2020/03/239-bond-specification-calculation.html

230) Differences between investing into Bond Market vs Bond Fund 

http://highlevelrules.blogspot.com/2019/07/330-bond-market-vs-bond-fund.html

222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html

22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html

48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html

61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html

240) Past Pandemics Effect on Stock Market

240) Past Pandemics Effect on Stock Market

Here is a compilation of past pandemics effect on Stock Markets Performance.

A)  Major bear markets since the one that began in 1929, triggering the Great Depression:

Bear Market Start	Bear Market End	Approximate Duration	S&P 500 Decline
September 1929	June 1932	33 months	86.2%
March 1937	April 1942	61 months	60%
May 1946	June 1949	37 months	29.6%
August 1956	October 1957	14 months	21.5%
December 1961	June 1962	6 months	28%
February 1966	October 1966	8 months	22.2%
November 1968	May 1970	18 months	36.1%
January 1973	October 1974	21 months	48.2%
November 1980	August 1982	21 months	27.1%
August 1987	December 1987	4 months	33.5%
July 1990	October 1990	3 months	19.9%
March 2000	October 2002	19 months	49.1%
October 2007	March 2009	17 months	56.8%

DATA SOURCE: S&P DOW JONES INDICES DATA, VIA KIPLINGER.COM. 

Source: https://www.fool.com/retirement/2018/11/18/a-market-crash-is-inevitable-heres-what-to-do.aspx

B) Surviving the coronavirus crash: ‘You make most of your money in a bear market; you just don’t realize it at the time’

Stock prices today are the transitory opinions of Mr. Market, who often is emotionally unstable. Mr. Market did not carefully value your companies today and decide they are now worth less. No, he woke up in a panicked mood and indiscriminately marked them down as if they were overripe bananas at the grocery store.

The stock prices on your screen now say nothing about what these companies are worth. Nothing at all. But valuation is all that is going to matter in the long run. I promise you one thing: the value of your companies doesn’t change 8%-10% a day, day after day.

Source: https://www.marketwatch.com/story/advice-for-the-coronavirus-crash-you-make-most-of-your-money-in-a-bear-market-you-just-dont-realize-it-at-the-time-2020-03-18

C) How the stock market has performed during past viral outbreaks.

Historically, Wall Street’s reaction to such epidemics and fast-moving diseases is often short-lived.

According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76% (see attached table):

EPIDEMIC	MONTH END	6-MONTH %  CHANGE OF S&P	12-MONTH %  CHANGE OF S&P
HIV/AIDS	June 1981	-0.3	-16.5
Pneumonic plague	September 1994	8.2	26.3
SARS	April 2003	14.59	20.76
Avian flu	June 2006	11.66	18.36
Dengue Fever	September 2006	6.36	14.29
Swine flu	April 2009	18.72	35.96
Cholera	November 2010	13.95	5.63
MERS	May 2013	10.74	17.96
Ebola	March 2014	5.34	10.44
Measles/Rubeola	December 2014	0.20	-0.73
Zika	January 2016	12.03	17.45
Measles/Rubeola	June 2019	9.82%	N/A
			—Source: Dow Jones Market Data

Source: https://www.marketwatch.com/story/heres-how-the-stock-market-has-performed-during-past-viral-outbreaks-as-chinas-coronavirus-spreads-2020-01-22

D) Do’s and Don’ts for the Next Bear Market

Source: https://www.schwab.com/resource-center/insights/content/dos-and-donts-next-bear-market

E) Selldown continues as political tension, virus weigh 

Source: https://www.klsescreener.com/v2/news/view/645882/selldown-continues-as-political-tension-virus-weigh

F) The Stock Market Has Caught a Virus

How did the market perform during epidemics like this?

• The stock market was quite immune to the epidemics in the last two decades.
• Since 2000, Swine Flu outbreak in 2009 was the worst pandemics which claimed over 200k lives worldwide and 4k lives in the US alone. However, the S&P 500 Index rose 36% in the 12 months after the outbreak started in April 2009.

Source: https://www.myerscapitalmanagement.com/the-stock-market-has-caught-a-virus/

G) “SARS” Versus “Wuhan”: The Difference Between “Now & Then”

With the stock market perched near all-time highs, it is understandable investors are quick to dismiss the potential ramifications of the virus very quickly. There is also plenty of anecdotal evidence to support the bullish claims as well. The chart below is the S&P 500 index versus its exponential growth trend with a history of the more important viral outbreaks notated.

Throughout history, markets have always seemed to bounce back from deadly viral outbreaks. However, long-term charts tend to obfuscate the damage done to investors who have a much shorter investment time horizon.

Source: https://realinvestmentadvice.com/sars-versus-wuhan-the-difference-between-now-then/

H) US Bear & Bull Markets Since 1926

A look at bear and bull markets through history

With the stock market officially in a bear market,  here’s a look back at each decline of at least 20% since the 1930s to see how long, and how severe, such downturns typically are.

Here’s a chart of the S&P 500′s returns in bull and bear markets:

https://www.cnbc.com/2020/03/14/a-look-at-bear-and-bull-markets-through-history.html

Pandemics Death

Source: https://www.nabtrade.com.au/investor/insights/latest-news/news/2020/03/pandemics_throughout

Source: https://twistedsifter.com/2020/03/visual-timeline-of-pandemics-throughout-history-infographic/

COVID-19 CORONAVIRUS OUTBREAK (Live Update)

Source: https://www.worldometers.info/coronavirus/

Source: https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/

Overall Stats Source: https://www.worldometers.info/coronavirus/

Wish all of us be safe and stay healthy.

May the Virus Infection stops soon.