What about the stock market? Should I hold on to my stocks? Should I sell them all? Should I be buying stocks during a depression? If economic activity is slowing down over the coming years, why would I want to be in stocks? These are all important questions, and I believe there are good answers. Let’s take a look.
Important Rule
One of the most important rules you can ever know about the stock market is that the stock market and the economy are two different animals. The stock market does not reflect economic reality – instead, the stock market reflects people’s perceptions of economic reality.
Once you understand this rule, we can move on. Read it a few times if you need to.
Now, looking forward, this means that the stocks can be both overvalued and undervalued at any time, during any economic cycle including a depression. Therefore, you need to stay on top of your portfolio and be willing to buy and be willing to sell at various times. This doesn’t mean market timing, but it does mean, paying attention and realizing that if your stocks are up 80% in a few months during a depression, maybe you should take some off the table. Similarly, if your quality stocks that are still making tons of money are down 50% in a few months, maybe you should add to your position.
Dividends
The other thing you should focus on is dividends. Dividends provide you with real return and cash in your pocket. Once a dividend is paid and the cash is in your pocket, that money is no longer at risk. As you move into this depressionary era, it’s important to make sure most of your stocks pay dividends.
Dividends will offset some of the loses in a major crash and will keep your portfolio paying you out over time. Consider dividend stocks in sectors that will hold up during a depression. Think about what people will still spend money on – namely, the essentials in life. Find companies like these with nice dividends and populate your portfolio with these stocks.