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How might HNW investors cope with another Great Depression?

A big drawdown in capital markets seems imminent. What steps should you take, and when?

Markets are doing well these days, but have you stopped to contemplate how you would cope with an economic depression? A real depression like 1929, not something like the fairly recent global financial crisis.

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That question can certainly focus the mind.

Surely, some of the coping will involve a state of psychological depression, but the real question here is about the things wealthy people might do if they found themselves in a world-wide economic crisis that was longer, deeper and in all ways more severe than anything they have experienced in their lifetimes.

It is easy to gloss over the consideration because it would be too difficult to contemplate in a meaningful way. As a species, we generally tend toward an optimistic predisposition, and that usually serves us well. (I wrote about Optimism Bias in a previous column.)

More to the point, we often don’t spend serious time and energy contemplating life in an economic depression because depressions invoke a secular change in behaviour, and high-net-worth people have come to love their lifestyles. Having spent most of your life in a pleasant, comfortable frame of mind, it is difficult imagining taking a significant step backward at this point.

Last year, after the start of the COVID-19 pandemic, HNW investors lost around $16 trillion in global wealth. The thing is, in percentage of household wealth, that was a cake walk by 1930s standards. By the end of Q3, 2020, most markets around the world were testing new all-time highs! To determine your true commitment to being a “long term investor,” surely something more chronic and persistent needs to present itself.

A crisis that lasts less than half a year from beginning to end is not really a crisis at all – it is merely a short-term scare. What if, next time, markets not only dropped further but stayed down much, much longer? What if next time was sometime soon?

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The first thing people need to do when faced with a totally new set of circumstances is to recalibrate their outlook to better align with the new reality. The sooner the adjustment is made, the sooner you’ll find peace in a “new normal.” Possible changes include:

  • Lower your expectations. Instead of bouncing back in 6 months, think about being negative for 6 years. For context, remember that Japanese investors are still underwater compared to 1989 Nikkei levels. Buckle up for the long haul.
  • Be honest with yourself. Think deeply about what will do well in a challenging environment. Specifically, think in terms of basic needs. Things like food, shelter and clothing (not Armani suits) might be safer investments.
  • The past is unlikely to be an accurate prologue. In the 1930s, bonds did well as a natural complement to stocks. Given the ridiculously low interest rates we’re seeing today, that experience is not likely to recur.
  • Follow the money. Governments throughout the Western world are committed to things like a “Green New Deal” and the buzz phrase “Build Back Better.” The economy that rises from the ashes will certainly have considerable public policy and financial support from the public sector.
  • Since cash and cash flow are likely to be king, it would be prudent to keep your options open to capitalize on opportunities when they arise.

For many reasons, a significant drawdown in capital markets seems imminent:

  • Valuations (Shiller CAPE ratio and Buffett Indicator on the S&P 500)
  • The rise of the Delta variant
  • Inflation or deflation, depending on whom you believe
  • Supply chain disruptions caused by climate catastrophes
  • Protectionist trade policies, populism and the like
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These factors are all contributing to the heightened risks in markets. Some are likely to persist for some time. Once we find ourselves in the hole, it’ll be much harder than usual to dig ourselves out.

Does anyone seriously think the level of debt we’ve incurred (both in government and as individual households) will be suitably resolved in our lifetimes?

I would like to offer some meaningful remedies, recommendations and responses to readers, but I’ll demur. Not this time. There is no doubt in my mind that a few opportunities will indeed present themselves when the market crash comes, but identifying them in advance is a fool’s errand.

The idea is to cope with, not profit from, what seems to be coming. While it would be great if a large swath of people could profit from a drawdown, that is unlikely.

Think deeply about what you would do if we headed into a genuine depression. What steps would you take? When would you take them? Better yet, write down what you resolve to do if genuinely bad things start happening. Perhaps you could begin by defining, in your own terms, what constitutes a bad thing in the first place.

Then, commit to keeping your promise to yourself. Don’t aim to prosper. Just find a way to cope.

John De Goey is an IIROC-licensed portfolio manager with Wellington-Altus Private Wealth (WAPW) in Toronto. This commentary is the author’s sole opinion based on information drawn from sources believed to be reliable, does not necessarily reflect the views of WAPW, and is provided as a general source of information only. The opinions presented should not be relied upon for accuracy, nor do they constitute investment advice. For proper investment advice, please contact your investment advisor. John De Goey can be reached at john.degoey@wprivate.ca
John De Goey