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30th May 2019 | Michał Karol Ejdys | Portfolio Quantitative Analyst

Depression - how to build your personal investment strategy?

Imagine that the CNBC just broadcasted that the market has been shrinking for six months now. We are in recession. Your portfolio of stocks is losing value. What should you do?

You could switch to bonds, but there is a wave of bankruptcies in the corporate credit markets, and the yields are rising on sovereigns, so that would be pointless. It looks like every asset class offers nothing else but losses. What should you do? First of all, calm down. There is a trend in the market, which is a good thing. Unlike stagnation, there is a certain direction in which things are heading, and everybody can see it.

Go with the flow

If things are really not looking to improve any time soon (interest rates high, corporate investment low, unemployment low – no potential for additional sources of growth for companies) it is time to short some stocks or look up some inverse ETFs (ones that appreciate in value when their underlying index falls). There is a trend and there is an easy way to benefit from it, just the other way around this time.

Often depression is accompanied by deflation

Couldn’t be better! In a deflationary environment, you appreciate in value just by holding cash, contrary to the inflation to which we are used to. The easiest thing you can do – revert a sizable portion of your portfolio into cash and wait for the trends to reverse. Then buy the preferred asset class again, at discount prices, after it has fallen in value during the depression.

Revert to defensive industries

Consumer staples, utilities, telecoms – these are the usual safe havens for recessions. They should not lose too much value, even though everything else is at the time, as their value is undeniable no matter what the phase of the economic cycle is. Unless, of course, they were overvalued before. In any case, just think about Coca-Cola – it took just 2 years to recover from the recent crisis, versus 8 long years for the broad SP500 market. 

It is ok to ask for help

Again, just as with stagnation, it can be argued that depression, at least in the short-term, is a better environment for active investors. Careful stock selection and especially the ability to short stocks or indexes that hedge funds have, makes them better suited to reach better than average returns. Individual investors have their hands tied, as retail brokers rarely offer shorting stocks or inverse ETFs. Therefore, in such times, it can be beneficial to use the services of a professional portfolio manager, invest in a mutual fund or any of the other managed services. 

But you can still do just fine alone

What a retail investor can still do, though, is revert to cash. They can try to time trough of the depression, then buy stocks or the index ETFs again and hold them. Or, if the investment horizon is long enough (think 20 or more years), just ignore it and hold to their portfolio. Timing the trough correctly is tricky, whereas, as history shows, holding on to your assets has worked every time so far. Doing nothing can certainly be hard when you are losing your savings but given all the evidence and simplicity of this solution, should be considered carefully.

Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication.
All Investment products are at risk, as their value can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.

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