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Is the next Great Depression on the way? No way!

For long-term investors worried about the unbelievable volatility on stock markets at the moment and wondering what their next money move is, there could only be one reason why you would want to change your general strategy — a Great Depression!

Do I expect it? No. Does anyone? Yes, Harry S. Dent, Jr. Is he right? Could be, but I doubt it.

If Harry, the author of The Great Depression Ahead, is right, then we all should go to cash and wait on the sidelines until we can guess the right time to get back into stocks. That would mean that we’re choosing to take five to six per cent on a term deposit until we’re pretty sure that we’re out of the woods, but is this the wisest strategy?

For me, rather than opting for the Freddy Krueger nightmare crash option, maybe you should believe in bedtime stories and pray for a Goldilocks outcome — even if it is a recession or downturn!

The logic

More on this later, but for the moment try coming along with my logic on the subject of whether we should just sell our shares, ditch our long-term strategy, and simply sit on cash. In case I’m confusing you in trying to be objective, I’m sticking to shares and my long-term strategy of buying good quality companies that pay dividends, despite the possibility that Europe’s debt drama and debacle could hit the global banking system and send shares diving.

In case your memory doesn’t serve you well, we have had menacing money problems since 2008 when the GFC began and featured big events such as the failure of Lehman Brothers. This resulted in the governments of the world embarking on a stimulus program, backed up by a decision to support their banking systems.

This averted a Great Depression then and the question is can we do it again?

Shares recap

Before that, let’s just recap on how shares have served us over the past two years, to see if they have been better than term deposits in these troubled times.

I always look at share performances on a financial year basis, as this is the time period where we either pay taxes on our capital gains or go using our losses for tax purposes.

From 1 July 2009 to 30 June 2010, the S&P/ASX 200 went up from 3939.5 to close at 4301.5, which was a 9.2 per cent gain and if you pocketed about four per cent in dividends, you were up around 13 per cent.

Then from 1 July 2010 to 30 June 2011, the index went from 4284.6 to 4608, which was a 7.5 per cent gain. Throw in a four per cent dividend on average and you could have gained around 11.5 per cent.

And if you were doing this inside a self-managed super fund and you were receiving fully franked dividends, then these returns could have been even higher.

These aren’t bad results considering the shocking news that has grabbed headlines over the past two years. Not bad considering the negativity, the fear and the unwillingness for many investors to give up their safe, cash-dominated positions.

Can it happen again?

So can the stock market do it again to defy the doomsday merchants?

Well since 2008 and before the big bounce in March 2009 when the news was drama-filled, the D-word was being thrown around and worldwide politicians were scurrying to protect their hides and showing a complete lack of leadership, we saw stocks dive around 50 per cent. This means we need to see stocks go up 100 per cent to bring us back to where we were before, but this kind of thinking is fault-ridden.

We don’t have to go back to where we were to be in a good space, wealth-wise. I don’t think we will go past the market highs of October 2007 for quite a number of years. However, we will pass those levels and create a new high and then another crash will happen.

Muddle-through thesis

The 2007 highs were false highs and were created by the silliness of sub-prime loans and cheap money right around the world, and what’s happening now is that governments like in Greece, companies such as Centro and many financial institutions around the world are being given a reality check.

This is what the ‘muddle-through thesis’ looks like on a day-to-day basis and it can be really scary and sometimes quite exciting but the long-term investor shouldn’t be distracted by the daily noise.

Euro-debt issues

We’re in the hands of European officials who have shown themselves as being incredibly inept, US politicians who are pathetically self-interested and central bankers whose performances have been second-rate at best.

For the really scared — retirees with small balances in their pension accounts — I can see why the cash option makes sense but you need to be ready to go a little more risky once it is believed that the worst of the Euro-debt issues are behind us.

This could take over a year but when the consensus says the worst is over, there will be a big bounce in stocks. Until then, I have faith that the collective wills of governments and the best economic minds in the world can avoid the policy mistakes that created the Great Depression of the 1930s.

Goldilocks downturn

I think a Goldilocks downturn is more likely where stock prices don’t rise by much, unemployment doesn’t go too high and house prices don’t fall by too much. This view rests on my belief that the likes of Brazil, Russia, India and China or the BRICs, will give the global economy the grunt that was missing in the 1930s.

This is a tongue in cheek comment, but thank God for formerly underdeveloped and Communist countries that are now playing catch up in the materialism/capitalism game!

Great Depression? Not!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Published on: Monday, September 19, 2011

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