How to Invest in a Depression

I love how the same people telling you that stocks were the way to go at a 14K dow are not telling you to sell at 6K. The take home is don’t listen to articles such as this and stick to “one” strategy and maintain it as much as your investing power permits.

Also- look back at every recession bottom (or depression) and you will see a 100% rebound within 1 or 2 years. No one knows where the bottom will be, but keep in mind it will be there when you want to pull out the most.
Posted By ad, New York: March 10,
2009 11:39 am

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I think you need a bit of a history lesson in the markets, friend. The Dow dropped from 386 in 1929 and didn't return to that price until 1954! The Nasdaq dropped from 5100 in 2000 and now is at 1350 9 years later. Due a little simple research before you spout off silly statements on "investing".

Depression, holly smokes, the media has overblown this, and most of you are buying into this. Most of you never lived through the 1970's and early 80's. Gees, this is not even that bad! If you want to make it worse, take unemployment up above 10-11%, add a nice desirable 18% mortgage rate, and you will see a real difference. Now that is a recession.

On the other hand, lets look at a depression. Take the unemployment up to 25%, but wait, women did not work outside of the home, so then and additional 50% of the population that does not work and thus, was not counted. That brings the real unemployment up to about 62-65%. Now take about 15,000 local banks(every bank was local) and close their doors, with no insurance, so the money is "really" gone. The only thing that you have left is what is in your pocket, or on your back. You can't sell your home at any price because those 15000 banks are not lending money, remember, they are closed. No one is adding money to banks that are open, because of the fear that they will close. So there is no money to pool to buy your house. The only food that you have, is what you grow, you can't sell much food because people have nothing to buy it with. Think of everyone on your block is out of work. That is a depression.

Get real, we are not in a bad situation. It is just a little difficult for some.

Im not sure why people are saying this stemmed from greed. It stemmed from stupidity. There are so many uneducated people in this country its sickening. DONT buy a house you cant afford, dont buy a new car when your old one works just fine. Stop having children!!!! When I look around I see that the majority of people having children these days are the majority of people who shouldnt be allowed to have their genes passed on to the next generation. I haven't even started a full-time job yet and Im already sick of paying for crackheads and drunks to collect welfare and unemployment. Im sick of giving money to parents who dont force their kids to go to school. Im sick of hearing about the worst car company EVER being kept alive with our money. Im also sick of politicians…and not economists, planning our recovery packages. Now Im hearing that the jobs created with this stimulus will go to Illegal Immigrants!!! Also the govt needs to stop lying about marijuana. Its no more harmful than alcohol or tobacco when used as an adult. Legalize it and tax it. Heck you could even nationalize the whole industry so that the govt reaps all the profits. Prohibition is CLEARLY not working if 42% of Americans have used pot. Stop using tax dollars to fight an ever growing industry. Legalization will drive drug cartels out of the industry through economies of scale, thereby reducing crime and reducing younger childrens access to the drug. There will always be poor people, Obama needs to stop making it acceptable though. There needs to be incentives to succeed in this world…not incentives to stay jobless.

I love how the same people telling you that stocks were the way to go at a 14K dow are not telling you to sell at 6K. The take home is don't listen to articles such as this and stick to "one" strategy and maintain it as much as your investing power permits.

Also- look back at every recession bottom (or depression) and you will see a 100% rebound within 1 or 2 years. No one knows where the bottom will be, but keep in mind it will be there when you want to pull out the most.

For whatever it is worth Buffett calls this a depression. The brutal reality is that avoiding losses is more important than the gains. The odds are that most people will never in their lifetime recover from a 50% stock loss, 20% real estate loss, 100% job loss, no retirement saving, debt…

Sadly, I have placed my bets on how people and the gov't will act out of desperation, hope, greed, and ignorance.

These are some of the most stupid comments I have read. Like Jim R from Minneapolis who says countries like China, India grew their markets sucking at the ……. !

All this goes to further prove those infamous two words – Dumb Americans…! You got yourself in this shit and hopefully you will stay there, while the Chinas and Indias of the world take over!!

Wow some of the comments I have read here are some of the most ignorant ideas ever committed to a keyboard.

Criminals have taken over the banking system. Obama will not save you. He is a charismatic front man for the international banks. If you are not in gold and tangible assets you will get burned.

Some say that depression is a part of the cycle of democracy and therefore a part of the US Business cycle but in actuality, it was because of our spending habits and our idea of wanting more when we don't have the money to spend on more. The government will do it's best to fix our problem but we can't blame them for not regulating wall street because we come to the realization that they are just as greedy as we are. We want the best possible return, latest products at the cheapest costs, and we want the house we can't afford and the let us have those things. The recession will lead to an eventual depression and we should pop out of it by the end of this year beginning of next, but remember that it is our economy that is suffering, and our problem to fix it, spend wisely. Do not borrow when you don't need it. Keep spending.

People, please, come in off the ledge. Things are not good, but they're not that bad either.

We all need to concentrate on basics: food, clothing, shelter, health, and social, in that order. Everything beyond what you need and a few things you really like is just stuff.

We've had depressions before, and this is probably the 6th one for our country. We have much better knowledge of them now. The ARRA Stimulus Program is the solution. I would have put much more into public works (it's only about 45% now), but it should work just fine. We'll get through it.

Take care of yourselves, try to enjoy life, and be ready to enjoy the upswing when it arrives.

Alpacas are great, sound investments! I invested in one 3 years ago for $20K and have doubled my money already.

For everyone who seems to believe that Depressions are inevitable, I can't help but wonder about the economic histories of the following:

Algeria, Bangladesh, Belarus, China, Cuba, Egypt, India, Libya, Laos, Namibia, North Korea, Norway, Portugal, Sri Lanka, Sweden, Syria, Tanzania, Turkmenistan, Venezuela, Vietnam, Zambia

These are Socialist according to their constitutions. Other than the likes of China, India etc that grew their economies sucking at the teat of American unfettered free-market Capitalism and aree now collapsing, how have these countries fared over time?

Or let's consider countries that have socialist policies, like Australia, Brazil, Canada, Finland, Germany, Ireland, Israel, Netherlands, New Zealand, Scotland, Singapore, Thailand, United Kingdom, Wales.

Again, other than the current crisis caused by American unfettered free-market Capitalism how have they done?

Just wondering.

"Cautious and considered investments will see a reasonable rate of return in the long run"

Define "long run" please. The FIRST time the market was this price was 1996. (Forget the of-reported LAST time of 1997, for a long-term investor the first time is what's important.)

If you put a dollar in the market in late 1996 you now have that dollar. Long Run must mean a couple lifetimes.

boycott the "socialist" economy? You sir, ought to be the first laid off. How will you make your trailer payments? By your standards, any tax at all that is progressive in nature, is socialism, hence we've been socialist for many many decades. Take a macro econ class.

Everyone sees how Obama the savers punishes with higher tax and regulation. It is our patriotic duty to withdraw all funds from banks and retirement accounts. Go into gold and BOYCOTT the socialist economy. Cheers,

I am surprised that none of the comments mention anything about a connected world, a globalized world. We must realize that whatever this is, depression or recession, it is a first of a kind when one factors in the globalized world. So none of us will have any data on how this will shape out give this new angle (globalization) and at best can make a guess on what could be the possible outcome.
Here is my 2 cents : we will come out of this because the stimulus will create jobs, given that the skinny guy with a funny name (Obama) is honest and his administration is better than the previous ones and is made up of some of the best brains in the business. These jobs in turn will create demand in CHINA (yes China, because we are so used to sub 10$ products of great value) and then China will buy America’s debt, the dollar will continue to be king, era of 300k jobs is OVER, get that, frugality is in for the long haul, meaning that we wont have excesses, but at the same time we will have controlled 3% gdp growth come 2011..wishful thinking? Well at least better that nothing at all

Eventually a depression is enivateble, in fact we haven't had one in 90 years, look back into time, we were over due… it is a part of life, one that helps us change things, the last time improved insight this one will tell future generations high regluation, keep debt down, and junk like that. You can disagree, but seriously… look back the reason why they don't like the word depression is because the the great depression. we had depressions before it (fact) and we will have more, in the future far, and possibly near (widely held opnion).

p.s we are the corperation nation, that is our problem this time around…

and also a quick message: If you bought a house you couldn't afford, or a car you couldn't keep up with, if you spent 90% of you money and had 10& for fun, or to save, if youyour a banker who got into the sub prime, if your a investor who though what went up would NEVER come down, or though that the negative savings rate would hold up, if you made 7 figures a year, or even made more than 250,000 dollars a year and lost you job and cant afford to live(p.s i grew up in the 90's with 2 brothers and 2 sisters and my family live on 50k a year- and a sibling had medicle problems), if you fell for a scam and lost your money, if you listened to other people… well i have something to tell all of you…I DO NOT FEEL BAD FOR YOU…NOT EVEN A LITTLE OUNCE OF SORROW… GET A LIFE ITS YOUR FAULT

Recession… Depression? who cares what the technical definition is? 66% of America's population depends on their next paycheck for basic living expenses. To put that into perspective, that is 200 Million people out of our total population of 300 Million that are living paycheck-to-paycheck.

We have one of the highest standards of living in the world but have NO savings and TONS of debt. America as a whole is a few paychecks away from total financial disaster. The Government has been making promises for years that it cannot keep. Tax revenue will not even be enough to pay the interest on the national debt at the rate the government is spending.

We will have deflation in the short term followed by Hyper inflation. The "entitlement attitude" that persists in this country will turn to anger when the Government cannot save everyone. There is a real possibility that we could see bank holidays, disruption in delivery of basic supplies and civil unrest.

The US DOLLAR BUBBLE is growing and when it pops we will see the largest paper loss in history.

Im a life long optimist and don't want to spread fear, but someone has to tell the truth because the media sure isn't. I believe America's best years are ahead of us but this downturn will last 10+ years. America has been shot with a financial shotgun and wounds don't heal overnight.

Remember there is PROFIT in confusion! and amazing opportunities will arise out of this mess. Its time for America to get back to its roots. God Bless!

I read recently on German news website that during the Depression the best investment for the Germans turned out to be gold followed by real estate. Investors were completely wiped out with most other types of investments.

The 1920s-30s in Germany might or might not correlate well to the present situation in the US, but the history is worth noting.

We elected Obama because we trust he will do the right job at the right time. He is putting forth a huge effort, facing gigantic problems. Perhaps it's time that those of us who elected him did the same.I believe many Americans would be willing to do something if we knew what to do. What would happen if every working American that voted for Obama invested $50 in the stock market on a designated day?

what i find interesting is that the goverment is using 1800 century tactic such as john m. keyes theories to fight 2100 century problems. depression or no depression america we have a problem.

I work in the airline industry where I took HUGE paycuts and other concessions.My coworkers and I have been in a recession for the last 6 years,the restof the world is catching up to us.My 401k is not doing well and there is no disposable income left after bills to invest in anything.We,the common working people did not create this fiasco,but we are the ones paying the price.When is the last time anyone heard of a corporate executive laying themselves off?

Definition:economic depression as a prolonged period of recession, or a significant and prolonged downturn in the economy. Characteristics of an economic depression include declining business activities, falling prices, rising unemployment, increasing inventories, public fear and panic.

Economists differ in their opinion of what exactly constitutes recession and depression. Many define recession as two or more quarters of reduced Gross Domestic Product (GDP). GDP measures national income and output for a country’s economy. Per capita GDP is often used to measure the standard of living, with the thought being that as GDP rises, so too does each citizen’s standard of living. Hence, measuring GDP provides clues as to the overall health of the economy and a glimpse into the health of an individual’s wallet.

I'd rather own 0% yielding GOLD than 0% yeilding CDs. I don't trust Obama with the fate of the US Dollar.

Ahum, I started buying shares end of last october. Before that I looked at the market for over 2 years. But I just could not see real bargain value in the market. So since november 2008 now, every week I am buying a bit of shares, very diversified. Bite by Bite. Until now I have lost money (ca. 20%) , which is not strange seeing the steady decline of the Dow. Of course, I also do not know when the bottom is reached. But I "think" this, to me, seems a bit of a strategy to ride it out.

For a number of stocks it must hold (I guess): "What has gone down must go up ???

Any comments from the distinguished readership on this strategy?

Chris, from MA:

Thanks for the update; you must be an economic historian or such. I didn't find those previous two, but I now notice that they have Wiki articles, too. I'll do some more research later … the Panics of 1792 and 1819 certainly fit the current problem: asset bubbles followed by removal of easy credit and a wave of defaults.

I don't buy into the author's "10% decline in GDP is a depression". No way; that's just a deep recession, and it probably won't be more than 3% decline for the year 2009 anyway.

We now have falling prices (oil, housing, food, etc.); that's a depression.

We'll get through it, but we need public works programs to insure that people are hired and paid; tax cuts and interest rate reductions don't work in a depression because people stop borrowing, lending, and spending. We also need people to spend most of what they make, minus a little for rainy day savings.

I wish everyone well.

Most people have yet to realize how really screwed they are …now and possibly far into the future….THANK YOU RONALD REAGAN AND THE DISCIPLES OF UNREGULATED, LAISSEZ-FAIRE CAPITALISM.

If this isnt a depression then I dont know what you could call it. The stock market has halved itself in a year. Oil has gone up to alltime highs and retreated to 5 year lows in about a 4 month period. Deflation has begun, although I wouldnt call it that. More like correction as our markets were overheated and overpriced across the board. Our banks have become zombies supported by govt bailouts and we're losing jobs at about a half a million a month. Its not great but its a depression.

Does anyone else find the comments about buying gold and firearms annoying? It is important be realistic about investments and expected returns. Cautious and considered investments will see a reasonable rate of return in the long run. If you're lucky enough to have available cash now, there are deals to be had in the market. You'll be in for a rough ride, but the payout will materialize in time. As for buying a gun to protect assets? The writer's comment is tired and not remotely creative.

Mike, from CA.

You missed 2: In the 1780s, the country fell into a post-Revolution depression caused by war-debts, expanding state debt, high taxes and rising interest rates. The crisis led to the creation of a gold backed U.S dollar in 1792.

The "Panic of 1819" lead to a depression after the post War of 1812 boom in real estate speculation and credit expansion. It resulted in massive bank failures, foreclosures and asset deflation (sound familiar?). It was considered America's first major financial collapse at the end of a boom-bust cycle.

Along with the crisis' of 1873 and 1929, many comparisons can be made to what's unfolding today…it's very informative research subject.

Depressions have occurred about once every generation and it is complete arrogance to think it can't happen in our time. The pattern speaks volumes about human behavior and our tendency to expect something for nothing. We are a bit overdue for the current adjustment that is upon us.

Regarding what is said:
“In times like these, where we are looking at deflation rather than inflation, even a 0% yield is a positive return.”
I strongly disagree.
"0 yield" means you still have the same amount, IT IS NOT POSITIVE because you get nothing extra besides the risk of putting your money somewhere away from you. If you put your money nowhere you would still have the same "0 yield" plus you would take "NO RISK AT ALL".

One commentor made this argument:

"You or I might disagree with this (I would argue that a jobless rate over 15% is a better measure)"

I agree. A lot of economists are still making claims that this is NOT a depression, but a "severe" recession. Verbiage. Maybe the difference is like a 'beheading' and a 'head severing?' Well, until "depression" is better defined, I would disagree with those economists. Remember that the first slide of the Great Depression took 3 years! Finally by 1932 things were dire. Well, we've only really been in this thing about one year. The slide this time is a LOT steeper as far as the market AND unemployment go. What will the next two years bring?

Maybe a head-severing is better than a beheading?

Once again, the mainstream media totally misses the boats. Investors, sell all of your stock, bonds and other holdings, and purchase precious metals – gold, silver, platinum. Actually take physical delivery on your new investment. Keep it hidden away. And reap the profits.

Joe, your assertion about domestic manufacturing is a myth. The United States manufactures more goods by far than any other country in the world. The United States' percentage of total global manufacturing has been consistent for many decades as total global manufacturing has risen. Do a quick internet search and you will confirm this.

The Depression of the 1930's was preceeded by an agricultural depression of almost 10 years duration where people were unable to make it on the land. The drought and dust bowl years finished them. It only came to be called a depression when it finally caught up to the money men and scam artists inflating the bubble.

Likewise this time, the Bush Depression, which has finally caught up to the money mongers and salesboys, has been preceeded by the Reagan Depression in manufacturing and the productive economy. It has been characterized by stagnant or falling wages and prices masked by illegal immigration and imports. For example wages in meatpacking were ten to twelve dollars per hour in 1980. They are below that today. Clothing is manufactured for overseas sweatshop wages today rather than a living wage seen in 1980. The chunk taken by retail is so great it has become difficult or impossible to manufacture profitably in the United States while paying a living wage.

There is far too great a burden of non productive salesmen, managers, bureaucrats, facilitators, resellers, bankers, accountants, retailers and on and on for the economy to recover yet. People need to get to working for their living and wealth rather than investing or inheriting.

The World has finally found out we were leveraging our homes rather than saving. Payback time is here. I'm glad I didn't put all our eggs in one basket. 1/4 home, 1/4 cash and treasuries, 1/4 art and collectables, 1/4 mutual funds- large cap USA and foreign stocks

Isn't this the same Barro from the Barro-Ricardo Hypothesis that is used to assert that deficits do not matter?
Unemployment data is vastly different than during previous downturns. Time limits for benefits, restrictions on part-time work, contract labor exclusions from being counted, etc. Comparing unemployment data is really an apples/oranges problem.
Inflation is a weighted price index measure. As health insurance premiums are excluded from it, and this is a $2 Trillion industry, inflation measures are "rough guesses" at best, downright misleading at worst.
In addition to the price bubbles that burst preceding the earlier depressions, there was a run-up in household debt. Fortunately, we have not had enough occurrences of these to have a statistical understanding of the exact causes and/or consequences. So we are all flying blind.
Deficits don't matter? Ha-ha-ha… where do they did these guys up from?

buy empty land near cities/suburbs where property tax is low. many of these are former "vacation" lots which may eventually be turned into housing when times get good again, they are already zoned/water/powered so there is little development needed and one can buy from owners for a good discount now. beware the ubiquitous internet land scams howerver, do your homework, use a local realtor etc.

Invest in CD's or Money Market funds???!!! What!? Is this writer nuts? Please don't take the advice of this writer Penelope Wang. Go buy yourself some gold / silver, and firearms and ammo to protect your assets.

I think that one of the problems is that we don't manufacture many items here anymore. It seems the money goes out of the country, rather than being spent here. I know that items made outside of here are cheaper, but try to find items made in the USA.? I think every coouontry needs a manufacturing base to survive, we don't seem to have it anymore.

People are confusing expansion/recession with inflation/deflation. They are mutually exclusive. You can have a deflationary expansion or an inflationary recession. As far as the difference between a recession and a depression goes, I use the collapse in the banking system as the the dividing line. So, we are there.

The problem with defining a depression is that we ware comparing apples and oranges when it comes to unemployment, especially. Think about older workers having to work before there was Social Security. Also consider that there are more students than then. Add in illegals aliens and people on welfare and we can see that it is hard to compare this current meltdown to the Great Depression.

We also have fewer bank failures because of the bailouts. But how many banks are on the verge of being banks in name only?

In 1932, we has zero national debt. Once we break the downward spiral, then we have hyperinflation to face. The only difference between a depression and hyperinflation is that in the first case no one has a job and therefore can't afford to buy anything. In hyperinflation one has a job and can't afford to buy anything.

Sam, the Harvard economists provided their definition in the first paragraph of the article, "GDP and consumption will fall by 10% or more, something not seen since the early 1930s—in other words, a depression."

You or I might disagree with this (I would argue that a jobless rate over 15% is a better measure), but GDP and consumer consumption are more traditional economic measures. I felt this story was lacking any depth, but it was supposed to be a quick advice piece on a scary, scary topic…

Got gold?

Sorry, me again.

In general, the classical definition of a recession is two consecutive quarters of falling GDP; the classical definition of a depression is a sustained period of falling prices. As you know, both of these ‘definitions’ are still hotly debated, mostly for political purposes.

Just wanted to reply to the other poster.

Somehow, we'll make it through this.

This is a very timely column. I couldn't advise a 'normal' person investing in stocks at a time like this, certainly no more than 50% of one's assets. It's probably better to go into TIPS, GNMAs, CDs, cash or anything that's Treasury-issued or FDIC-insured. It's also a good idea to have a little 'mattress money' just in case there's a bank holiday for a few days or weeks.

Most people don't realize that we've actually had three depressions in the history of the USA: 1837 – 1842 (Panic of 1837) , 1873 – 1896 (Long Depression), and 1929 – 1933 (Great Depression).

There has been some research about depressions vs. recessions, but obviously it has not been enough; I started out at Wikipedia and followed the leads. The classical definition of a recession is two consecutive quarters of falling GDP; the classical definition of a depression is a sustained period of falling prices. As you know, both of these 'definitions' are still hotly debated, mostly for political purposes. The recessions seem to start out with an inventory buildup, leading to the needed correction; lower interest rates and a few tax cuts seem to cure them. The depressions seem to start out with an asset price bubble (raw land in 1837, commodities in 1873, stocks in 1929, and real estate in 2008 ?), leading to a collapse when a government or event yanks the credit out from under the economy; recoveries have taken from 5 to 23 years, and strong fiscal stimulus seems to be the only thing that 'works'. I'm concerned that the current situation sounds a lot more like past depressions than past recessions. And, I was surprised to see how not correlated the economy and stock markets were during past depressions. But, I'm not an economist … there's at least one book in here to be written by someone. Hopefully, this one will last less than 4 years and they'll call it the Short Depression.

I haven't found much stock market history on the Panic of 1837. During the Long Depression, US stock markets averaged more than 15% average annual compounded return for the 23 years, the best performance by US stock markets in history. During the Great Depression, stocks oscillated violently: 1929 was the worst year ever, and 1933 was the best year ever.

This is not my field. Right now, it feels like we're living history instead of reading about it. I hope that we'll come out of this with a much better economy based on more stable businesses.

I'm not so convinced that deflation is taking hold. I think we're in for serious inflation in the intermediate term, making locking money in low yield CDs a bad investment if they are denominated in USD.

first you have to define what a depression is. There seems to be a mindset of the great depression when there have been many others. In fact the word recession started after the great depression. So what do you mean by "depression" ?