I guess I will start. Today is the first day this year that I am almost 100% into the equity market - actually all in XSP (S&P 500 hedged to the Canadian Dollar - since I don't want the currency risk) for now. I have been dipping my toe into the market every-time the market dropped below 8,300 on the DOW, and if the market bounced up - I sold out completely - since I had no faith that the market is at the end of the troubles. I am still up around 5% since I started putting money back into equities around a month ago (bounce - sell - drop - buy). It is not that I am planning to trade like this - it has just happened. Do I think that the market has bottomed - no. I moved in 100% today.
So why am I investing now. Well, I try to measure this against the worst case scenario - the depression. If I invest in the market (currently down around 50%), and it does follow the great depression, then 5 years from the bottom - the market will have retraced it's way back to 50% from the top. It came off the lows very quickly - so if you are trying to time it - you probably will loose out in the first 30% retracement anyways. That is risk that I can take (since I will not have to access this for 25 years).
My guess is that we might see a lesser version of the great depression (call it a mini-depression) - although more likely a severe recession. If it is not as bad as the great one, then it will be a positive.
The difference between the two is that recession is a loss of GDP - 2 quarters in a row or more, depression is similar but with the worse boogyman of deflation. Of course if there is deflation, then even if you loose money year over year (small percentage) - it could be considered growth (deflation is worse than inflation).
The markets crashed from 1939 - 1942, unemployment went up very high (25%). Unemployment being driven by a few factors, there was a major shift in productivity, industrialization - which means you needed less workers to do the same job. I think this will be a lesser effect this time (IMHO). In addition, the population was growing at a considerable pace - something that is not currently happening.
Although the GDP dropped to it's lows in 1932, it rebounded back to its pre-crash level within 5 years (above if you factor in deflation). Higher GDP would also a likelyhood of profitability as well. Within the first 5 years, the stock market indexes recovered around 50% of there lows. It probably would have been higher if people were not scared away from equity -- but in that case the companies would have profit - but would be priced at a lower price to earnings ration. That means that the value was there, but not realized - or realized through dividends.
Now we have more pools of professionally managed money on the sidelines right now (as opposed to individuals), which means that eventually it will get back into the market (which should be a positive over the depression) - so even if individuals are scared out -- the best thing to do is to take loose money (if you have it), and invest through the trough - which if dollar cost averaged, should show a return within 5 years. Of course it might be hard to sleep at night if markets go down 50% more - but we have better drugs now
What vehicles do people have for investing today (long term). There is the RRSP (for people looking to retire 10+ years from now) & TFSA (starting Jan 2) accounts. I would like to see the government change the rules and merge RRSPs and RRIFs, basically there would be no maximum age where you can contribute - this would allow people to delay withdrawing funds if necessary. It costs some tax income, but sooner or later the government will get there cut - even if someone never withdraws the money (taxed on withdrawal, then estate tax).
The TFSA (tax free savings account). It is good if you can save money, since although you don't get a tax deduction for contributions - you don't get taxed on capital gains or interest earned in those accounts. The contribution limit is $5,000/year. So if you put money in a savings account - it is better to put it into a TFSA.
Based on this -- the biggest worry for people -- is to try and stay employed..... not the markets.
That is my viewpoint, and the reason why I am investing now.
http://www.ritholtz.com/blog/2008/11/speaking-of-the-great-depression/
http://www.sjsu.edu/faculty/watkins/recovery.htm
