How to invest as if a depression is coming?

September 20, 2008 2:17 AM

How to invest to make money if a depression comes? Assume a repeat of the Great Depression's on the way (i.e. not a Mad Max depression): can you invest in way to make money when it happens? (Like some kind of short selling, some kind of option trading like the author of Black Swan does/did (and what's minimum investment on this or mutual fund type vehicle that follows this)?
posted by Furious Fitness to work & money (12 comments total)

puts are options that bet on a stock falling. the more said stock decreases, the more the put increases. there is significant risk involved - expiration and total loss of investment are to be taken into account. do your homework before you get involved in such things.

safer: gold is currently celebrating a historic high in value. people are flocking to securities.
posted by krautland at 2:26 AM on September 20, 2008

Gold has been fluctuating between $50 to $60 per ounce daily - when Lehmans went down, it went up $120 2 days later (I made a nice little return).
posted by strawberryviagra at 3:03 AM on September 20, 2008

Remember that the Mad Max situation was the result of Oil Shortages, not financial mayhem stemming from unpayable mortgage loans.

I am not a financial professional, but the way to go here, always actually, is to buy the top american brands. companies like Coca Cola, General Electric, Intel, . These companies are not only the best in their class, but they pay dividends better than any CD.

If there is a "great depression" You don't want to be actively trading and buying options unless you know exactly what you're doing, in which case you wouldn't be asking this question on here.
posted by Paleoindian at 3:26 AM on September 20, 2008 [1 favorite]

Actually, one of the main messages of Nassim Taleb's book is that stock trading for fun and profit basically doesn't work.

In my (non-economist) opinion, the best thing you can hope for is to keep your money when the depression comes. Buy tangible things like real estate, gold, or stock of companies producing raw materials.
posted by Zarkonnen at 3:46 AM on September 20, 2008 [2 favorites]

The thing is, from everything I've read, the scenario here will be quite different than the Great Depression. Some people are already seeing huge losses in their housing investments (30%) so if you didn't lose money in that you are already off to a good start.

Is your job secure? If we continue to have problems there will be increased job cuts. Some economists are saying that what is happening here is going to be more similar to Japan's problem in the 90's.

If your job is in a sector where there may be cuts -- consider more education. A new field, grad school etc.

Everything I have read says keep your money where it is. If you can figure out when we've reached a bottom, then that may be a good time to put significant money in the market. The problem is because this situation is so irregular, I don't think anyone knows when that bottom is. They've just put a ban on short selling, which many people are saying will create a temporary increase and then there will be another crash.

Keep up with some of the economists' blogs it will keep you tuned in to what is going on.
posted by hazyspring at 5:46 AM on September 20, 2008

The first thing to realize is that no one can accurately predict what is going to happen to various financial investments in the future. You're really better off investing in a conservative manner where you'll be protected in all possible economic outcomes--inflation, deflation, recession, or prosperity. A mix of stocks, treasury bonds, gold, and cash (treasury bills) would be best. If you're interested, this is all explained in Harry Browne's book, Fail-Safe Investing.

However, if you feel like you can predict what's going to happen better than most investors or you need to hedge against depression even more than the above portfolio would, you'll want more gold and/or bonds. Gold (also commodities in general) will protect you against inflation, while long-term treasury bonds will protect against deflation. Unfortunately, it seems like we're headed for massive inflation or massive deflation, but no one really knows which. You can either pick one and bet on that happening, or you can be conservative and invest in both gold and bonds which will offset each other to some extent.

Specifically, the easiest way to hold gold is probably an ETF like GLD and there are tons of commodities ETFs/ETNs like DJP, GSG, PCRDX (although watch out for counter-party risk--the chance that the issuing company will go bankrupt, a big problem these days). For treasuries, you can hold the ETF called TLT or you can buy long-term (25+ year) treasuries through a broker or directly from the Treasury.
posted by Durin's Bane at 6:25 AM on September 20, 2008

I have to agree that no one can know the future of the market, and because of this no one can know what the right investments will be. I sort of saw this coming, though I am still shocked at the abruptness of it, so I have been trying to figure it out for a few years. I can say that I moved my personal investments mostly to cash, in insured bank accounts and in treasury money market accounts; my remaining stocks and stock funds are hedged with some long-term SPY puts that I bought about a year and a half ago. I moved my retirement into bond funds, because that was what was available to me, and I expect about a 40% drop from the peak of the stock market. I have a month supply of cash tucked away at home, just in case.

I have no idea if what I have done is right. It could be that to get out of the tremendous debt the US has run up, the Fed will print lots of dollars, devaluing them. In that case, I would expect inflation to rise, and the cash I am in is bad (if you look on the Blue for Malor's posts, this is what Malor expects, to an extreme). With inflation, commodities and gold would historically be good, but commodities seem to have been in a bubble of their own because everyone was expecting China and India to grow, keeping demand up and supply down. If there is a global recession, their growth might stop, eroding commodity value. Gold is already near a record high, so buying now is scary.

I am considering diversifying into some foreign currencies that might do better than the dollar, but foreign governments often have economic incentive to keep their currencies weak compared to the dollar, so that might not be a haven either. Stocks tend to keep pace with inflation, but it seems we might be about to enter a severe recession, and stocks don't do well there. If you look at what happened in the US in the 1930's you can see that the big stock market crash in 1929 was no where near the bottom - in fact, most losses in the market came over the next 3 years, when the market continued to drop and lost another 80%+ in value, so even a crash now might not be a good time to buy. I would like to think that Ben Bernanke would avoid the same mistakes that led to that, but who knows?

The bottom line is that what is going on is far outside any historical record we have. No one can tell you what is the right thing to do. Even the professionals are far outside their experience. One day you might look back and tell your grandchildren about this moment, but there is no way to tell now what is the right thing to do.
posted by procrastination at 7:37 AM on September 20, 2008 [2 favorites]

If you look at what happened in the US in the 1930's you can see that the big stock market crash in 1929 was no where near the bottom - in fact, most losses in the market came over the next 3 years

Don't try to invest in this market until you paper-trade for three months or so. A lot of money was made & lost last week, but the experienced peeps tend to make it and the newbies are the ones who get the hose. I'm still a newbie and almost got my head cut off Friday.

I think the "Economics & Finance" blog sidebar at ml-implode.com provide a pretty good overview of the current macro situation. Read them for a couple of months.

So, stay in cash, learn about the macro. Playing in this market is like playing billiards on boat. The game keeps changing from under you.
posted by troy at 10:03 AM on September 20, 2008

All ways of betting on a decline involve a fixed time window. Put options have expiration dates when the contract has to be settled. If you sell stocks short, you have to buy again within a fixed period of time.

So it's not just a matter of wagering on a decline. You're wagering on a decline soon. If you guess wrong, and the crash is delayed, you still lose money.
posted by Class Goat at 11:41 AM on September 20, 2008

There is a whole philosophy of what does well in lean economic times vs. what does poorly. For example, if money is tight, people might be more inclined to repair their car than buy a new one. This requires investing in individual stocks, but I wouldn't be stunned to find out someone is running a mutual fund on this philosophy.
posted by Kid Charlemagne at 7:32 PM on September 20, 2008

re: class goat's best answer: are there mutual funds/other vehicles that do this?
posted by Furious Fitness at 11:24 AM on September 21, 2008

Yes, you can invest in the UltraShort line of ETFs. Their objective is to perform double the inverse of their target index. So if S&P goes down 5% one day, SPS (the UltraShort S&P ETF) ought to go up 10%. They don't always perform exactly this way, and long-term this calculation doesn't maintain itself (e.g., if the S&P went down 50% over the year, SDS probably wouldn't go up 100%).

All in all, it's a good approximation.
posted by FuManchu at 11:27 PM on September 21, 2008 [1 favorite]