When the economy contracts, as happens during recessions and depressions, many people want to keep their assets in cash, considering it to be a safer investment than the stock market or real estate. Others look for opportunities to invest.
Your decision about what to do with cash during a depression will depend on how risk averse you are as an investor. Regardless of your willingness to take risk, several options exist for your consideration.
People who are risk averse want ways to store their cash that pose little opportunity for loss. The safest place to literally store cash is in a safe deposit box at a Federal Deposit Insurance Corporation (FDIC) insured bank. If your FDIC bank fails, you’ll have the opportunity to access your safe deposit box under a new owner, or to clear the box out should the bank close for good.
You’ll pay an annual fee for a safe deposit box, but in terms of pure protection, it’s a better option than using your mattress for storing extra cash. In 2009, annual fees for a safe deposit box range from $10.50 for the smallest size from Banker’s Trust (2 inches by 5 inches by 12 inches), to $185 for the largest size they offer (15 inches by 22 inches by 22 inches). Check with your local bank for rates in your area.
Put your cash in a savings or checking account at an FDIC insured bank. Since the FDIC was created in 1933, no depositor has lost any insured money. (see Reference 1) As of October 2009, you can keep up to $250,000 in one bank and have full insurance coverage. If you have more than $250,000 in cash, open accounts at separate banks so that all of your funds are insured.
The Financial Institution Regulatory Authority (FINRA) recommends paying down your debt as one way of weathering tough financial times. (see Reference 2) Interest costs and fees can eat away at your income, so consider using some of your spare cash to reduce your debt burden.
A slightly higher risk option than maintaining pure cash is investing in a precious metal. You can buy gold and silver coins outright at coin retailers or pawnshops and put them in your safe deposit box, or you can invest in precious metals through the stock market. Be aware that precious metal prices fluctuate and while prices may increase over time, they may also fall.
Depressions and recessions can be great times to invest. Generally, prices in the stock and real estate markets are lower and present opportunities to select quality assets at discounted prices.
Always understand the company you’re investing in, the product or service it delivers and its strategy for future growth and income. If you’re wary of buying stocks, consider purchasing investment grade bonds, which may provide a lower return, but should provide more stability.
Foreclosed homes and businesses can be good investments as well, but remember to consider location, condition and how the asset will provide a return to you until the market improves. For example, can you lease the house or business location in the current market to generate cash flow? Do you have enough cash to let either sit empty until the market improves and you can lease the property or sell it for a profit?
Regardless of whether you choose to invest in the stock or real estate markets, do your homework to find healthy investments.