Depression investments corrected

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star9
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Depression investments corrected

Post by star9 » Fri Oct 07, 2016 1:15 pm

What I meant here, as noted by a poster, is advice for the possibility of deflation, rather than inflation.


It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?
Last edited by star9 on Fri Oct 07, 2016 7:06 pm, edited 1 time in total.

BW1985
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Re: Depression investments

Post by BW1985 » Fri Oct 07, 2016 1:24 pm

Cash?
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Grt2bOutdoors
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Re: Depression investments

Post by Grt2bOutdoors » Fri Oct 07, 2016 1:25 pm

U.S. Treasury nominal securities and cash. Nothing like collecting a positive coupon when rates are deflating.
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zaboomafoozarg
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Re: Depression investments

Post by zaboomafoozarg » Fri Oct 07, 2016 2:02 pm

I Bonds

and Prozac

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RyeWhiskey
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Re: Depression investments

Post by RyeWhiskey » Fri Oct 07, 2016 2:06 pm

star9 wrote:It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?
By depression do you mean deflation? I ask as you framed the question as though depression was the inverse of inflation, which is not necessarily true. But, in the case of deflation (decreasing money supply), treasury bonds have historically done well, with better returns the longer you go out in duration. So long term treasuries would perform best in a deflationary scenario, however, with interest rates where they are you would be assuming a fair amount of interest rate risk as well. :beer
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Ever Ready
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Re: Depression investments

Post by Ever Ready » Fri Oct 07, 2016 2:09 pm

What advice do you have for preparing for the possibility of depression?
Pay off your mortgage and all other debts.

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nisiprius
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Re: Depression investments

Post by nisiprius » Fri Oct 07, 2016 2:20 pm

I have two answers. The first is that in "The Great Depression: A Diary," by Benjamin Roth, he expressed regret at not owning Treasury bonds. I hadn't realized it but during the Great Depression, even when banks didn't actually fail, they often froze withdrawals. You could not withdraw money, and the only thing you could do with your bankbook was to sign it over to a buyer who would pay you $0.25 to $0.50 on the dollar and wait for the bank to resume withdrawals again. It's also noteworthy that even though he was a firm believer in the gold standard, at no point did he use or suggest the use of physical gold.

The second answer is: you can't predict the future, and any really effective way to "prepare" for a hypothetical situation is going to cost you a significant amount, in one way or another... and you can't afford to prepare for everything.
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Re: Depression investments

Post by adamthesmythe » Fri Oct 07, 2016 4:21 pm

My thesis advisor survived hard times in Germany after the war by repairing appliances.

So I recommend developing a skill that will allow you to barter for necessities. Growing vegetables, repairing things, raising chickens...

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Re: Depression investments

Post by tludwig23 » Fri Oct 07, 2016 4:22 pm

zaboomafoozarg wrote:...and Prozac
Beat me to it! :beer
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Watty
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Re: Depression investments

Post by Watty » Fri Oct 07, 2016 4:32 pm

star9 wrote:It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?
Even if you are generally right there are lots of timing issues and variation in the ways that it could play out. For example the long term government bonds that were mentioned would not do well in stagflation where the economy in general slumps while there is high inflation.

Having a well diversified portfolio is likely a good way to be prepared for most possibilities.

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Re: Depression investments

Post by tludwig23 » Fri Oct 07, 2016 5:03 pm

star9 wrote:It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?
The two are not opposites. We can have depression (a long term downturn in economic activity) and still have inflation. The risk of deflation can be mitigated to some degree with TIPS, or even EE series bonds which are guaranteed to double in 20 years.
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Dutch
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Re: Depression investments

Post by Dutch » Fri Oct 07, 2016 5:27 pm

Gold lovely Gold!

Grt2bOutdoors
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Re: Depression investments

Post by Grt2bOutdoors » Fri Oct 07, 2016 5:55 pm

Dutch wrote:Gold lovely Gold!
Can you make change with it at the grocery store?
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Re: Depression investments

Post by TomCat96 » Fri Oct 07, 2016 5:57 pm

star9 wrote:It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?

This is actually a question I think about frequently. My answer is, it completely depends on how bad you think things are going to get.
Therein lies the problem and the answer.

Are you talking about small shocks?
Are you talking about medium level inflation?
Are you talking about hyperinflation?
Are you talking about systemic meltdown?
Are you talking about civil war/anarchy?

There's a difference between trying to survive a great depression, vs surviving Greece-like austerity conditions, vs surviving Zimbabwe hyperinflation.
If you're going to prepare your investments for the future, there is no catch-all way to prevent such a wide variety of hardships. In fact, from what I listed above, I wouldn't even feel confident giving a number to which is less or more severe.

On this website, we talk about bonds for safety. Bonds should protect against all "normal" economic conditions including dramatic downturns. Bonds will not protect you if conditions go sufficiently awry. For example, bonds are denoted in a particular currency. If faith in a currency has failed, then the promise of future payment in that currency will also be worthless.

For that matter however even gold has its limits. Nevertheless...

My father was a refugee of war who lived during the taiwanese hyperinflation which took place from 1945-1952. He would tell me silver was the accepted currency used in those times to procure food on the streets. What that tells me is, anecdotally, the protective capabilities of precious metals as wealth is very high.

At any rate. Make no mistake. A 25% drop in the stock market is not a crisis on the level my father faced. Nor was the worst of the financial crisis of 2008-2009. Preparing your portfolio for such strong assumptions of disaster could cost you dearly, both in the potential growth you would be forgoing, and in increased transactions costs that are associated with less conventional investment strategies.

Is the inflation you're talking about going to arrive within the next three months? The next year? The next 10 years?
Even a broken clock is right twice a day. Even if you are correct that the current conditions in the market is a portent of coming disaster, if you are off by even a reasonable amount of time, you may well be sufficiently wrong that you would have been better off leaving your money in the market in the first place.

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RyeWhiskey
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Re: Depression investments

Post by RyeWhiskey » Fri Oct 07, 2016 6:18 pm

tludwig23 wrote:
star9 wrote:It seems there is a lot of advice about how to invest to prepare for the possibility of inflation.
What advice do you have for preparing for the possibility of depression?
The two are not opposites. We can have depression (a long term downturn in economic activity) and still have inflation. The risk of deflation can be mitigated to some degree with TIPS, or even EE series bonds which are guaranteed to double in 20 years.
Forgive me, but I was under the impression that TIPS are a terrible investment during deflationary periods. I-Bonds at least cannot lose principal. Any evidence to the contrary, or am I mistaken?
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Dutch
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Re: Depression investments

Post by Dutch » Fri Oct 07, 2016 6:43 pm

Grt2bOutdoors wrote:
Dutch wrote:Gold lovely Gold!
Can you make change with it at the grocery store?
My reply was tongue in cheek, but I'm not seeing your point. As opposed to stocks and bonds?

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Re: Depression investments

Post by itstoomuch » Fri Oct 07, 2016 6:55 pm

I have my guesses.
YMMV, :oops:

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Re: Depression investments

Post by nisiprius » Fri Oct 07, 2016 6:57 pm

RyeWhiskey wrote:...Forgive me, but I was under the impression that TIPS are a terrible investment during deflationary periods. I-Bonds at least cannot lose principal. Any evidence to the contrary, or am I mistaken?...
It depends what you mean by "terrible." You just need to get rid of money illusion and think in real dollars. In real dollars, TIPS are equally good (or equally bad) during inflation and deflation. They are simply bond that are denominated in constant dollars. In deflation, they will lose dollar value, both in principal and in coupon payments, but it won't matter because the principal and coupon payments will buy exactly the same amount of stuff. It's hardly "terrible."

Obviously nominal bonds are better than TIPS in deflation, just as they are worse than TIPS in inflation. In other words, measured in constant dollars, nominal bonds have an extra risk factor that TIPS do not have.

There is also a strange corner case. "At the maturity of a TIPS, you receive the adjusted principal or the original principal, whichever is greater." That means that if you buy at TIPS with a face value of $1,000, and inflation adjustments bring its principal value up to $1,100, and you then encounter a period of sustained, severe deflation, the principal value will shrink until it reaches $1,000 but will go no lower. So there is actually, theoretically, a situation where they would be good in deflation (although again, not as good as a nominal bond).
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Re: Depression investments

Post by BigSaver » Fri Oct 07, 2016 7:11 pm

Serious answer: CDs & fixed annuities from highest rated companies, both of which will earn you some interest that is >0%, and provide cash. Also, gold as a hedge against unexpected events, as recommended by Jean-Marie Eveillard, former fund manager at First Eagle.

History is filled with calamities that strike even strong countries & their economies. I wouldn't bet everything on calamity, but it is not foolish to wonder & worry about deflation and/or depression. Diversify some portion of portfolio into CDs, fixed annuities, and precious metals.

On a less serious note, whenever gold as an investment is discussed, a funny parody commercial comes to mind, one that was on the Colbert show around 2009. Fictitious company Prescott Financial tells viewers how to protect themselves in the wake of the impending financial disaster, with actor John Slattery acting as spokesman. Good parody! Google search: Prescott Financial parody

heyyou
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Re: Depression investments corrected

Post by heyyou » Fri Oct 07, 2016 11:13 pm

Having extra savings and low necessary expenses would buffer some of the shocks to our income/investments. With 40 years of experience at living within our means, DW and I expect to adapt to whatever shows up in our futures. Those are our assets that would help us with deflation.

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Re: Depression investments

Post by AlohaJoe » Fri Oct 07, 2016 11:51 pm

itstoomuch wrote:I have my guesses.
YMMV, :oops:

just a way the bookmark this thread.
If you click the wrench at the top of the page (near Post Reply) you'll get a dropdown that lets you bookmark threads.

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nedsaid
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Re: Depression investments corrected

Post by nedsaid » Sat Oct 08, 2016 7:11 pm

Long term US Treasuries are the ultimate investment during depression times.
A fool and his money are good for business.

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Re: Depression investments corrected

Post by jalbert » Sun Oct 09, 2016 12:57 am

Treasury notes, bonds, and bills, FDIC-insured bank accounts, and GNMAs should all hold up during a deflation.

FDIC-insured CDs may also, but to a lesser extent, because of the potential for liquidity problems if banks suspend early withdrawals.

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Re: Depression investments

Post by Grt2bOutdoors » Sun Oct 09, 2016 10:56 am

Dutch wrote:
Grt2bOutdoors wrote:
Dutch wrote:Gold lovely Gold!
Can you make change with it at the grocery store?
My reply was tongue in cheek, but I'm not seeing your point. As opposed to stocks and bonds?
Ah, not recommending stock either.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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