Are We Ready for a Depression?
I was listening to someone this weekend talk about how our country is headed for further economic disaster. It was enough to make you want to take all you own and go hide away in a hole somewhere. Nonetheless, the doom and gloom did get me thinking: If a serious economic crash (we’re talking even bigger than the Fannie/Freddie issues), what should I be doing?
I currently have around $40K in stocks, all reliable ones, nothing mortgage-related, thank goodness. I also have my ER fund and my regular bank accounts. Wouldn’t it be terrible to just lose the whole nest egg because of a massive crash?
Then again, where would I be safe putting my money? I guess ING or some other savings, but those give very little return by comparison. And also, doesn’t the stock market always right itself, one way or another, over time?
Has anyone else been thinking about this? Not to be all Chicken Little, but I just wonder if we’re being given warnings for a reason.
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5 Responses to “Are We Ready for a Depression?”
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That’s a brutally honest and good question. During the 90’s my dad was under the impression that a depression was due to hit. So he did a lot of preparatory work to get himself ready financially, physically, and emotionally - spiritually we have to walk by faith so that doesn’t change
One of the details I recall from his discussion of things with me (I was in my teens) was this:
If you HAVE money during a depression, and assuming its a similar model to the 1930’s for the sake of assuming too much, then you can come out WAY ahead of everyone else. However, if you bought a house in the 20’s on credit and then it lost its value in the 30’s it didn’t regain its pre-depression value until the 50’s in some cases. If you bought some stocks in pre-depression times and then the depression hit and the stock was hit it could also take decades to recover.
Investing isn’t called speculation for nothing and so you have to figure out where you want to keep a portion of your money that you can’t lose. Your ER funds may be best in a savings account that is held in a bank that is rock solid. THen you might invest a portion in a slightly safer investment area (something that is ’safe’ is also subjective and still has risk) and then you might still put some in higher risk areas. This method is called the pyramid method by some.
There were some companies who came out substantially stronger during the depression because their business model was stronger than others. Their product was high demand, and so they succeeded. The problem with ‘talk around the town’ during financially challenging times is that people forget that just because a group of lemmings ran off the cliff doesn’t mean we all have to. Smart choices over time will pay off no matter what the current mass hysteria fad is.
As for timing the market in getting in and getting out there is a lot of risk in timing it wrong, but there is equal or worse risk of just watching everything plummet and you’re stuck with pennies for every dollar you’ve invested. If you are invested in stable companies that return or maintain consistent value, you’ll probably just want to keep watching them and pull money from sinking ships if you see them.
Lastly, as a believer your rewards are in heaven. As you abide in Christ you will be directed to live out a life of faith and if you do so the growth comes in trials and the growth comes in the good times. Am I scared about where the economy is going as a father and husband with outstanding loans? When I think of how I can do it? Yes. When I think of how God can teach me through this and grow me in the tough times I have to sit back and rest in His provision and know that He will be glorified in my life no matter what.
These times are no better or worse in some sectors, but change is an agent for economic growth or disaster wherever you are. If you make some smart and specific choices you could find yourself the next millionaire next door while previous neighbors are wallowing in misery. There is always the potential for disaster, but the potential comes with the ‘twin’ of great success, too. As stewards of God’s money, time and possessions, we’re enabled by His power to do awesome things with them. I’m confident that you’ll be surprised, but in a good way, with what goes down over the next few months, years or decades.
If you’re worried about the health of your financial institutions visit BankRate’s Safe and Sound Rating system to check up on them. I’ve got links to them and an FDIC calculator on my blog (http://socalsavvy.blogspot.com/2008/09/blog-post.html).
The way I look at things (as a fellow 20-something) is that I’m young and that this is actually a time to buy rather than panic and sell. Bear and bull markets will always alternate. This market is unfortuneate for those near and in retirement, but it’s actually a normal fluctation that is beneficial to younger people.
Remember: you want to buy low and sell high (and reap the rewards of many years of compounding interest).
I agree with So Cal Savvy in the sense that I am young as well and look to either investments or material items as a buy now rather then sell or invest. It might not be the best strategy always, but it is easier for us to bounce back and we have less financial responsibility. If you are going to play the risk/reward card, now is the time. If you want to be extremely cautious I guess you could always sell all of your investments and lock them up till the market switches gears.
Craig
http://www.budgetpulse.com
Yes and no. I don’t think it is wise to liquidate my retirement savings. Are your 40k in stocks for retirement (years away) or something sooner? Other than that, my “investments” are just in cash. If there is a depression, there really aren’t any steps I could be taking.
I mean, really, what should I do? Buy years supply of beans and rice, go back to my parents less populated town, get some ammo, and hide? Even cash has the potential to become worth a lot less through inflation.
If my retirement never recovers (unlikely), that sucks, but I’ll be ok.
I do think it’s wise to stockpile a little extra cash, but not to the point of panic. I’m concerned, but… I’m going on with life.
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