October 19, 2020

Categories: Investment

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This meaningful question was raised by one participant in my recent webinar on why there is a need to invest now.

I would like to share my personal insight on this, through the example below.

Let us go back approximately 91 years ago to revisit the Great Depression in the United States (U.S.). In the month of October 1929, the stock market fell by 50%1. This happened at the end of the 1920s, a period known as the Roaring Twenties, which had been a time of great optimism, high consumer spending and robust economic growth. Till then, the U.S. had enjoyed close to a decade of prosperity with total wealth doubled during that period. However, the year of 1929 saw the contraction of industrial production growth, soaring unemployment and an increase in inflation rate. Despite all that, the stock market continued to rise and became overvalued, leading to the sudden fall of the stock market in October of the same year2.

What did the Federal Reserve (Fed) do at that time?

They raised the interest rates, failed to act as lender of the last resort and as a result, cut money supply to the economy by 30%3. This led to unemployment peaking at 25% and the Gross Domestic Product (GDP) contracting by 20% in 19324. Deflation occurred, causing reduced consumption and bankruptcy in businesses, individuals and banks; which in turn led to decline in factory production growth, higher unemployment rate and heftier debts. This phenomenon lasted for almost 10 years and the people suffered extreme financial hardships.

Things only began to take a turn in December 1941, triggered by the bombing of Pearl Harbour5 which precipitated the country’s official entry into World War II. As a result, the U.S. dove right into full production mode and that saw the rise of employment rates. After the war, the country began to enjoy decades of prosperity and some have even said that this unforgettable historic event helped to rectify the unwise decisions of the Fed’s response in dealing with the Great Depression.

Coming back to today where we are facing the reality of a severe recession;

similar in terms, with an all-time high of 14.7% recorded in unemployment rate6, 0.3% inflation rate7 and a contraction of 5% in U.S. GDP growth8 with many experts forecasting that the worst is yet to come. The only difference is that this time round, the Fed has acted decisively. Instead of reducing money supply, they increased money supply and employed aggressive quantitative measures. This caused their balance sheet to increase to nearly 7 trillion9 in less than two months. Various central banks like the Bank of Japan and European Central Bank have also done the same10. Together, they are estimated to have pumped at least 10 trillion dollars into the world economy.

Now here is my question to you: How much of this 10 trillion will actually go into your pocket? If you are not currently an investor, the answer would likely be none at all. The savers or depositors will lose out big time in the long run. This is partly due to the wide wealth gap that these central bank policies have created and will continue to create.

I hope this offers you a perspective on why I believe there is an urgent need to stay invested. The choice is yours: To be an investor or a saver?

Love to have a deeper discussion about this? Do reach out to me and I would be glad to start connecting with you.

Share it with your friends!

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