Preparations and Taking Action
in Today’s Deflationary Environment
Editor’s Note: The following article is
adapted from Robert Prechter’s 2002 best-selling book, Conquer the Crash –
You Can Survive and Prosper in a Deflationary Depression.
In addition to this article, visit Elliott
Wave International to download the
free 15-page report about how to protect yourself, you wealth and your
family in this environment. It contains details about what you should do with
your pension plan, valuable tips for business owners, insights on handling loans
and debt and important warnings against trusting the government to protect you.
By Robert Prechter, CMT
The ultimate effect of deflation is to reduce
the supply of money and credit. Your goal is to make sure that it doesn’t reduce
the supply of your money and credit. The ultimate effect of depression is
financial ruin. Your goal is to make sure that it doesn’t ruin you.
Many investment advisors speak as if making money by investing is easy. It’s
not. What’s easy is losing money, which is exactly what most investors do. They
might make money for a while, but they lose eventually. Just keeping what you
have over a lifetime of investing can be an achievement. That’s what this my
book, Conquer the Crash, is designed to help you do, in perhaps the single most
difficult financial environment that exists.
Protecting your liquid wealth against a
deflationary crash and depression is pretty easy once you know what to do.
Protecting your other assets and ensuring your livelihood can be serious
challenges. Knowing how to proceed used to be the most difficult part of your
task because almost no one writes about the issue. My book remedies that
Preparing To Take the Right Actions
In a crash and depression, we will see stocks
going down 90 percent and more, mutual funds collapsing, massive layoffs, high
unemployment, corporate and municipal bankruptcies, bank and insurance company
failures and ultimately financial and political crises. The average person, who
has no inkling of the risks in the financial system, will be shocked that such
things could happen, despite the fact that they have happened repeatedly
Being unprepared will leave you vulnerable to
a major disruption in your life. Being prepared will allow you to make
exceptional profits both in the crash and in the ensuing recovery. For now, you
should focus on making sure that you do not become a zombie-eyed victim of the
Taking the Right Actions
Countless advisors have touted “stocks only,”
“gold only,” “diversification,” a “balanced portfolio” and other end-all
solutions to the problem of attending to your investments. These approaches are
usually delusions. As I try to make clear in Conquer the Crash, no investment
strategy will provide stability forever. You will have to be nimble enough to
see major trends coming and make changes accordingly.
The main goal of investing in a crash
environment is safety. When deflation looms, almost every investment category
becomes associated with immense risks. Most investors have no idea of these
risks and will think you are a fool for taking precautions.
Many readers will object to taking certain prudent actions because of the
presumed cost. For example: “I can’t take a profit; I’ll have to pay taxes!” My
reply is, if you don’t want to pay taxes, well, you’ll get your wish; your
profit will turn into a loss, and you won’t have to pay any taxes. Or they say,
“I can’t sell my stocks for cash; interest rates are only 2 percent!” My reply
is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish
there, too; you’ll have a 30 percent annual loss instead. Others say, “I can’t
cash out my retirement plan; there’s a penalty!” I reply, take your money out
before there is none to get. Then there is the venerable, “I can’t sell now; I’d
be taking a loss!” I say no, you are recovering some capital that you can put to
better use. My advice always is, make the right move, and the costs will take
care of themselves.
If you are preoccupied with pedestrian
concerns or blithely going along with mainstream opinions, you need to wake up
now, while there is still time, and actively take charge of your personal
finances. First you must make your capital, your person and your family safe.
Then you can explore options for making money during the crash and especially
after it’s over.
For more information, Prechter has made five
full chapters from his book available for free download.
What to do with your pension plan
How to identify a safe haven (a safe place for your family)
What should you do if you run a business
Calling in loans and paying off debt
Should you rely on the government to protect you?
Robert Prechter, Certified Market
Technician, is the founder and CEO of Elliott Wave International, author of Wall
Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of
The Elliott Wave Theorist monthly market letter since 1979.