How to Turn a Financial Crisis Into Opportunity

A financial crisis only becomes an opportunity if you have cash on hand.

An old saying in the finance industry is that “crisis is another word for opportunity”. It’s the unpredictability of economies and markets that make profit possible. If not for the randomness, prices would never change, and making money would be nigh impossible.

This volatility also means profits can come from downturns and crises. If you’re prepared, you too can turn this into opportunity.

How Does a Financial Crisis Turn Into Opportunity?

Let’s consider the last financial crisis in 2008/9, when sub-prime mortgages caused a lot of people to lose their hands.

While it’s bad news, this presented huge opportunities to many savvy investors - when houses went up for mortgagee sales (the bank sold them because the owners couldn’t service the loan), it meant an abundance of cheap - perhaps undervalued - properties. It provided plenty of opportunities for people with cash to buy houses at a discount.

This is similiar to Singapore’s sluggish property market at present: with many condos selling at a loss, wise investors can get hold of a house for cheap. It’s not just a property issue however; the same goes for almost any kind of asset, from stocks to gold.

Here’s how to use a crisis to your advantage:

Be Ready to Seize the Opportunity

A crisis is only an opportunity if you have cash on hand. For example, if there is a financial crisis tomorrow and the price of houses crash, you must have money to buy; otherwise, you cannot take advantage of the falling prices.

A crisis becomes an opportunity only if you have money when it happens.

For this reason, it’s important to be a disciplined saver. If you diligently set aside 20 per cent of your monthly paycheque, you could find yourself flush with cash while everyone else is desperate. This will ensure you can buy assets at a good price, when the market is crowded with eager sellers.

During a crisis, think buying rather than selling, as counter-intuitive as it sounds.

Pay Attention to Value Buys

During a crisis, many different assets will fall in value. For example, property prices will fall as buyers are less able to afford them. Stock prices will fall as investors retreat from the market.

This is an opportunity for you to buy something at a discount. For example, if you know a house is valued at $1.2 million, but it sells at $1 million because of the crisis, you stand a chance of making $200,000 once the economy recovers and the price levels go back to normal.

However, to take advantage of this you need to do your homework. Check the regular price of an asset - be it a stock or a house - over a long period such as 10 to 15 years. If you see the current price is far below the long term averages, you might be looking at a good value buy.

Use Regular “Pre-Mortem”

In the business world, a premortem (as opposed to a post-mortem) is a situation where company leaders envisage the firm being bankrupt. They then work backward, to determine how it happened. This helps to spot weaknesses and failed opportunities.

You can apply this to your own finances. When you are about to take a big financial risk (like buying what you think is a cheap stock), work out the worst possible consequences of failure. If you can deal with the outcome, you should seriously consider going ahead - there is no way to seize the opportunities of a crisis without some risk.

Job Loss Can Be an Opportunity

Retrenchments happen in a crisis; it’s one of the sad facts of a flailing economy. However, do remember that even people like Steve Jobs were made to leave their employers (in fact in Jobs’ case, he was fired).

If you have saved diligently (see point 1), there is no need to panic. Set a budget for the next two to three months, and start looking again. This time however, rather than settle for a simple replacement job, aim to make more. Your retrenchment might end up being the prelude to a better standard of living.

Again though, we need to emphasize the importance of regular saving and building an emergency fund. If you don’t have any money when the crisis hits, then you don’t have the luxury of trying to find a better job - you just have to take whatever is immediately available. For people without savings, a crisis is never an opportunity; it’s just a crisis!

For people without savings, a crisis is never an opportunity; it’s just a crisis! Nonetheless, we have some tips on how to survive job loss if you have no savings.

Buy Into Safe Haven Assets If the Crisis Escalates

Safe haven assets, such as gold and Singapore government bonds (like the Singapore Savings Bonds), are ideal during a crisis. First, they allow you to put your money where there’s minimal risk due to market conditions.

Second, some safe haven assets - especially gold - have an inverse relationship to how well the economy is doing. Gold prices tend to rise when times are bad, because a lot of people rush to buy gold in the face of financial instability. During the height of the crisis, you may be able to sell gold for much more than you initially purchased it.

Don’t Let Fear Take Up All Your Attention

As the famous adage by Warren Buffett goes, be greedy when others fearful (and be fearful when others are greedy). When a financial crisis hits, don’t just hoard your money and run - take a step back and analyze the situation. It may be your chance to get rewarded for all your prudence in good times.

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