#IM.01- GREAT DEPRESSION: THE WORST CASE SCENARIO
Updated: Mar 29, 2021
“This is a nightmare, which will pass away with the morning.” John Maynard Keynes on Great Depression. As an investor, there is always a fear of losing all the money that you have invested. The thought of not making profits, incurring losses instead keeps nagging the mind of an investor. The game of stocks is risky and there are chances that you might incur losses but if you are aware as an investor and you are full of patience, chances of you not making profits is 0.
What happened during the Great Depression?
The worst scenario the history has ever seen is the “Great Depression” 1929, where on Monday, October 28, 1929, the stocks fell by 12.8% and on Tuesday they fell by 11.7%. So within 2 days, the stock market fell by almost 24%! A quarter of everybody’s stock market portfolio gone, in just 2 days! The decade of the Great Depression i.e 1929-1939 saw a massive increase in unemployment and a decline in GDP by 30%. It was truly the worst case scenario that an investor could ever face.
Can it happen again?
Thinking about the Great Depression many questions come across our minds, can such a thing happen again? How can we survive this? To answer these questions, no such thing as Great Depression can happen again because of simple reasons that economies around the world have stabilized, banks are regulated properly and stock markets are far more efficient. But what if it happens again? For this let us have a look at this table and graph
There are bullish phases and there bearish phases, but mostly it is a bullish phase provided you continue to invest. It is very clear from the graph too, the returns from the stock market follows an upward movement and also a massive downfall is evident from 1929-1939 which represents the Great Depression.
INVEST FOR LONG TERM TO WIN THE GAME.
From the table we can see that during the Great Depression the average return is -0.63% but as soon as the depression is over the returns stars to rise. It is interesting to note that although anything can happen in the short term, over the history of the stock market, stocks have gone up on the average around 10%. Even in the worst case scenario you are going to be okay, but it is got to be over a long period of time. Persistence is the only thing that can help us in a situation like this.
THERE IS ALWAYS HOPE!
The Great Depression deserves its title. The economic crisis that began in 1929 engulfed virtually every manufacturing country around the globe. At the time of crises there were stocks that had no buyers at any price and within no time U.S had lost 30 Billion Dollars! This was more than twice the U.S national debt! Yet, U.S is the strongest economy in the world and home to 607 billionaires and 18.6 million millionaires, which is no doubt the highest in the world. This is possible not only because of the efficiency of the U.S government but also because of the investors who never lost hope and continued to invest. I believe, when adequate financial knowledge is mixed with a lot of patience there is no such thing as “worst case scenario”.