The correct analysis is that both deflation and inflation are possible. Anyone who warns just of inflation or deflation is missing half the puzzle - James Rickards
A few years ago, I spoke at my annual preparedness conference on the risk of another financial downturn. I think I may have stunned, if not outright upset, some of the attendees when I said:
Guys, here's the good news about the next financial crisis. We now know what one looks and feels like. We know it's survivable. And best of all, we know now what to do to protect our finances.
Perhaps they were taken aback by my use of the term "good news" when discussing the next financial crisis. While there's no doubt the crisis we endured ten years ago altered countless lives and our nation's history, we also learned a lot about ourselves, our economy and our government during that era.
Fast forward ten years. I've done several YouTube videos over the past year on the need to have a financial plan for when the market has its next big downturn. Today, I'd like for us to discuss what that means and how someone could go about doing it.
I'm not talking about the garden variety market corrections we see from time to time, which are necessary to a healthy marketplace. I'm talking about the need for a plan in the event we see something like we saw in the 2008 financial crisis.
I won't spend a lot of time making the case that such a financial crisis could occur again. As I talk to people about the prospects of another crisis, I find people either believe that it can happen again...or they don't. My job isn't to convince you it can happen. My goal is to provide ideas to those who believe that it can.
Inflation or Deflation?
One of the first questions we have to ask ourselves is whether we expect an inflationary event or a deflationary event. Simply put, will the next crisis be one where prices rise rapidly - faster than our wages? Or will it be another 2008, where prices for not only stocks but also cars, homes, and consumables falls dramatically?
Those who are concerned about the risk of another crisis often debate this enthusiastically. I don't think it's really necessary to debate the issue; I'd rather be prepared for either scenario and not worry about guessing which crisis may befall us.
For guidance on what to do in an inflationary crisis, Forbes contributor Clem Chambers outlines five investments which historically done well during such events. They include:
Meanwhile, contrarian financial expert James Rickards suggests we should be prepared for both deflationary and inflationary crises. In the aptly entitled article "Why You Should Be Prepared for Both Inflation and Deflation," Rickards outlines how you should invest in either scenario.
For the deflationary crisis, Rickards recommends cash, bonds and raw land. In an inflationary crisis, he recommends commodities such as gold and oil, stocks in blue chip companies with significant ownership in hard assets, along with collectibles such as fine art.
To help you identify what stocks you might choose in a market downturn, Kiplinger's has a list of blue chip stocks you should consider during a deflationary scenario.
Rickards recommends we "prepare for both [scenarios], watch carefully, and stay nimble."
If You Expect Another 2008 Style Crisis, Why Not Just Invest In Those Things That Did Well Back Then?
You certainly could, and fortunately we have some good clues on how to do that. U.S. News came up with seven stocks that performed well during the last financial crisis. As you scroll through these stock ideas, you'll see many names you recognize. You'll also quickly identify a trend with these stocks: companies that sell lower cost items and entertainment options did well during 2008-2009.
Can you make money while the stock market falls?
Consider investing in an inverse ETF which goes up in value as the stock market falls. Investing in one of these funds is very easy - you buy it just like your buying a stock if you're using an online trading account. For those who feel really adventurous, the inverse ETF with ticker symbol SDS is a leveraged inverse ETF. In rather simplistic terms, for every one percent drop in the S&P 500, SDS goes up by two percent. The catch, of course, is that for every one percent increase in the S&P 500, SDS does down by two percent.
It's not a trade for the faint of heart, but it can really provide meaningful gains in a deflationary event where the stock market is falling.
What can you do with your 401(k)?
The 401(k) issue is tough, because most people have very limited investment options. Your best bet is to study each of your investment options within your 401(k) and see how they fared during 2008-2009. That will give you a sense of what your best options are during a deflationary event. In that scenario, you may find it's better to just put your 401(k) in cash and ride out the downturn, knowing that the the dollars in your account are increasing in value (dollars increase in value compared to other currencies and investments during deflationary events.)
For inflationary events, the advice listed above is solid - find a mutual fund option that invests in hard assets, such as commodities and real estate.
Again, this will require a little research on your part, but it's not hard to do.
How to create your plan
I'm not a financial adviser. But I will tell you what I am doing now, and what my plan is, in an effort to give you some ideas.
First, I am currently fully invested in the stock market. I believe, as many experts do, we should expect the stock market to go higher for some time to come. That's not to say some event couldn't cause a major sell off or inflationary spike. But for now, my plan is to sit tight and remain invested in equities.
Once I decide it's time to change my investment strategy, I'll take two steps:
This is not as hard as you think. It does require you to do a little research. Spending time with a financial adviser you trust would also be a good use of your time.
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Preparedness isn't about buying a bunch of guns and military rations, waiting for "the big one." Much of what you will do to get better prepared will be tedious and boring.
And that's the good news - if you find your preparations tedious and boring, it probably means you're doing it right.
Here's where I tell you what I think about things I think about.