Through studying the problems of the past economic downturns and current market conditions, this study aims to generate investing strategies to help investors make decisions in bearish markets. Specifically, we investigate the problems or causes of the great depression, dot-com bubbles and the Asian financial crisis; then the performance of current market is examined in order to generate the investing strategies for individual investors.
Individual investors in this study refers to the individuals with an investment amount not more than SGD 100,000.
2. Past Market Downturns
2.1 Great depression
The great depression was a worldwide economic downturn starting in 1929 ...view middle of the document...
2.2 1997 Asian financial crisis
The financial crisis started in Thailand with the collapse of Thai baht, and it gripped most of the countries in Asia beginning from mid-July 1997.
One of the problems is the structural and policy weakness in the fundamentals, especially the inadequately developed financial sector and the mechanisms for allocating capital in the troubled Asian economies.
The shortage of foreign exchange has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to depreciate dramatically, while the International Monetary Fund (IMF)’s operations and its replenishment of funds made the crisis even worse.
To sum up, it was believed that there were many and different causes for respective Asian economies. Some of the other causes are credit default, rising external liabilities for borrowing countries, currency speculation as well as the ‘herd mentality’ demonstrated by both domestic and international investors.
2.3 Dot-com bubble
The dot-com bubble was a result of speculation in internet sector and technology industry. It was covering roughly from 1995 to 2001.
Numerous internet companies were set up in mid to late 1990s as a result of the huge growth of internet users from 1995 onwards. Many of these companies had daring business practices with lots of money invested, hoped to dominate the market. The speculators noted the rapid increase in value and decided to buy in anticipation of future stock price rises, rather than because the stock price are undervalued. This in turn created an exuberant environment which many of these businesses diminished standard business models, focused on increasing market share at the expense of business bottom line.
3 Current credit crunch
As the United States of America has become all too familiar with, and more recently, the world too has fallen victim to, we have found ourselves in the midst of another financial crisis. Labeled the ‘credit crisis’ or ‘credit crunch’ by many, what is different this time, from previously discussed crisis’, is governments, banks and investors believe to know the underlying cause, but are still uncertain of what is driving world markets to new lows every day. This is apparent through numerous actions by the Federal Reserve, the United States government and a collaboration of efforts by governments worldwide in attempt to stabilize the markets and economy without seeing an immediate turnaround to date.
3.1 The Beginning Two main Problems
“Big bets by banks, basic principles forgotten by citizens and the unexpected turnaround in the economy.”
With the American economy bustling, everything was looking great in the US real estate market. Prices for land and property had consistently shown growth since the mid 1970’s and banks were taken advantage of this . With almost a realtor like attitude, banks were confident that home prices were going to go up forever. Therefore, many institutions,...