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What to do (And What Not to Do)
During the Coming Deflationary Depression

Excerpted from At the Crest of the Tidal Wave by Robert Prechter

How might you go about surviving, and perhaps even prospering, in the approaching deflationary depression? Whatever your ultimate objective, you must think first of conserving what you have made during the good times. Take steps immediately to position yourself for maximum safety. Your first goal should be to get out of debt. Next, liquidate any assets that are likely to suffer in the depression. These include stocks, investment real estate, long term U.S. bonds and notes, corporate bonds, municipal bonds, "emerging market" debt and equity, overpriced collectibles and even your business, if it suits you.

Avoid having long term funds tied up in currently popular investment strategies. Eschew the now too popular exercise of selectively picking stocks and high yield debt instruments in an attempt to outperform the averages. Outperforming the traditional investment markets by buying the right issues is no longer a rational goal, as these markets will be falling, and outperforming (even if it is successful, which is a rare feat) will simply mean losing less money. Neither will "contrarian" stock market mutual funds be profitable in a bear market, as the only thing most contrarians are contrary about is what stocks to own, not whether to own them at all.

Given the high odds of a persistent decline in real estate values and the drying up of liquidity, readers of this book should avoid ownership of real estate for investment purposes unless you are a professional who genuinely knows something about a property that everyone else does not. The evidence of a change in trend for real estate prices in the late 1980s demanded only one change in your thinking: Consider your home only as a consumption item, no longer as an investment item. If you want to consume it, if you can afford it, and if it is situated to provide convenience, safety (in the case of social unrest) and the amenities you enjoy, then keep it. If you cannot afford it, or will not be able to afford it if you or your spouse loses a job, or if you consider it an investment and do not mind renting, then it is probably best to sell it. Renters are likely to enjoy the same "buyer's market" they did for ten years into the early 1940's during which time rents relentlessly declined. The best news of all is that when the collapse is over, the real estate bargains of a lifetime will be yours for the choosing. So preserve your purchasing power now, and keep an eye on auctions and bank sales for that property you have been dreaming to own.

When an economy deflates severely, both "inflation hedged" precious metal, commodity, and real estate investors and many "deflation hedged" bond holders find that their supposed safe stores of value are generating losses. In such times, there is no truly safe place to hide except cash and interest bearing cash equivalents. Though today cash is completely out of fashion in the investment world, you should take the maverick road and search out a safe haven for your savings. You will have to target your haven very carefully, as diversity is not going to save people this time. "Diversity" is one of today's great buzz words, which used to urge investors to get into as many markets as they possibly can. In the coming deflation, most markets are going to fall, so diversified portfolios will be guaranteed losers.

No investment market will be stable during this period. On the way down, there will be violent and exciting bear market rallies and an attendant bullish conviction in some markets that may even exceed that of today. Just keep reminding yourself that none of them is a place to "park your money" and forget about it. Remember also that major market collapses are rarely experienced as unmistakable and unidirectional trends. Although years after the fact, historians detachedly describe the violence and speed of each crash, financial implosions often feel as though they are occurring in slow motion as they happen, which is why it takes time for people to become alarmed enough to take defensive action. It is the old story that if you place a frog in a pot of cool water and heat it slowly, he won't notice he is being cooked until it is too late. With each passing month, keep in mind this comment from the stock market historian John Brooks about the 1929-33 experience:

It came with a kind of surrealistic slowness…so gradually that, on the one hand, it was possible to live though a good part of it without realizing that it was happening, and, on the other hand, it was possible to believe one had experienced and survived it when in fact it had no more than just begun.

Your salvation in this environment will not be diversification, but extreme and intelligent selectivity.

Excerpted from At the Crest of the Tidal Wave by Robert Prechter


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