Investing During a Recession

Submitted by: Submitted by

Views: 628

Words: 2694

Pages: 11

Category: Business and Industry

Date Submitted: 03/16/2009 09:59 PM

Report This Essay

1. Introduction

Through studying the problems of the past economic downturns and current market conditions, this study aims to generate investing strategies to help investors make decisions in bearish markets. Specifically, we investigate the problems or causes of the great depression, dot-com bubbles and the Asian financial crisis; then the performance of current market is examined in order to generate the investing strategies for individual investors.

Individual investors in this study refers to the individuals with an investment amount not more than SGD 100,000.

2. Past Market Downturns

2.1 Great depression

The great depression was a worldwide economic downturn starting in 1929 and ending at different times in the 1930s or early 1940s. It was originated from United States and had devastating effects both in developed and developing countries.

One of the generally believed causes was debt. During the 1920s, the loose credit policies ultimately lead to the over-indebtedness. At the time, investors were overconfident in the investment opportunities given the technological improvements and advances. As a result, large amount of borrowed money were used by speculators in stock markets. Under the conditions of debts and deflation, debtors started to default, banks began to fail, and the surviving bank tightened their lending, which intensified the deflationary pressure.

Another problem is the unevenly distributed wealth. The large and growing disparity of income made US economy unstable. The rising income of the wealthiest fueled the stock markets and formed the ‘speculative’ bubble. The bubble eventually burst when the unemployment reached one third high and consumption continuously decreased.

These two problems, together with other problems like the trade decline of the US and the Smooth-Hawley Tariff Act, the poor policy-making of US Federal Reserve System and continuous crisis in banking system, interacted with one another and eventually caused the...