The Best Investments During a Depression
Even though it may seem scary to invest your money during periods of economic uncertainty, it is generally the best time to start since prices are lower.
Researching the best investments during a depression will prepare you to seize the opportunity for massive wealth creation.
Experienced long-term investors educate themselves about economic depressions and understand that these events are significant opportunities to buy into the mass fear.
Recession vs. Depression: When Does a Depression Start?
When there is an extended period of economic decline, it may be considered either a recession or a depression.
During these times, the government and central bank may use expansionary macroeconomic policies (such as lowering the cost of borrowing money) to boost the economy.
While recessions and depressions have similarities, the following details will allow you to discover their differences.
What is a recession?
A recession is often defined as two consecutive declines in real GDP growth and a rise in unemployment.
However, to officially be in a recession, The United States National Bureau of Economic Research (NBER) must announce it.
The NBER also defines a recession as a decline in economic activity that lasts longer than a few months.
What is an economic depression?
An economic depression is a more severe version of a recession characterized by a sustained period of economic downturn.
An economic depression is accompanied by more severe events than recessions, such as bank failures, financial crises, and price deflation.
The most significant difference between a depression and a recession is the length of time it lasts.
It is hard to determine when we are in a depression, as there has only been one in history. The great depression lasted from 1929 to 1939.
The textbook definition of an economic depression is an economic recession that lasts more than 3 years or a 10%+ decline in GDP.
What are the Best Investments to Make During a Depression?
During depressions, many companies and people will go bankrupt, causing the prices of assets to drop.
The best investments you can make during a depression may fall, but given the world doesn’t end, the depression will eventually end, and asset prices will go back up once the economy starts to recover.
However, if you don’t invest in the right assets, you can experience significant losses…
Best investments during a depression:
Cash
Generally, when the economy is not doing well, holding additional cash allows you to weather the storm of the economy falling.
Inverse ETFs
If you believe the price of equities will continue falling, you can bet against the stock market by buying inverse ETFs.
Consumer staples companies
Even during depressions, people will still buy necessary items such as toothpaste and soap, making consumer staples companies a good investment during recessions and depressions (Such as Johnson & Johnson or Colgate).
Your own skills
The only investment that doesn’t involve risk is an investment in your skill set. The best way to make more money during times of uncertainty is to make your skills more valuable.
Index funds
Index funds and stocks will likely be trading at a discount during depressions, allowing investors to accumulate shares at lower prices.
What Happens to Cash in a Depression?
The U.S. dollar is the strongest currency worldwide, and many consider it a safe haven, especially in recessions.
Therefore, the U.S. dollar becomes stronger as global investors convert their currency to U.S. dollars in times of economic hardship.
The U.S. dollar is not strong or weak on its own, as you must compare it to another currency to determine its strength. Therefore, a strong dollar means other currencies are weaker compared to it.
The Fed is also causing the U.S. dollar to increase in 2022 since they are hiking the Fed funds rate, making it more profitable to loan dollars as interest rates rise.
How to Get Rich in a Depression
You may have heard the quote that more millionaires are made in recessions, and if you play your cards right, it is definitely true.
Famous investors such as Warren Buffett perform a detailed analysis of companies on the stock market to buy great companies at a discount.
To get rich in a depression, you must be comfortable taking risks.
It may seem risky to invest during a depression, but your risk to reward is actually much better compared to bull markets.
Buying stocks after a bull market ends is safer since you will pay less for the same great companies.
However, if you invest in a company that goes out of business due to poor economic conditions, you can lose a significant amount of your money.
The safest investments in a depression include diversified index funds and consumer staples companies since these will weather the volatility better than other more speculative investments.
Investing in a Depression: Bottom Line
Long-term investors must remain emotionless when the economy goes into a depression and avoid panic selling their investments.
The stock market has gone through long periods of negative to no returns, but index funds and fundamentally solid organizations will provide positive returns in the long run.
If you are not planning to retire in the next decade, you should take advantage of depressions by dollar-cost averaging into index funds.
Investing in yourself
If you are short on cash, investing in your own skill set is an excellent way to develop income streams.
You can learn many high-paying skills without leaving your house, like digital marketing, copywriting, and SEO.
All the information you need to start investing is available online for free, and once you earn more money, you can buy stocks on sale while everyone else is panic selling.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #063
