The Best Way to Prepare for the Coming Market

"The past is not dead. In fact, it's not even past."
-- William Faulkner

On Oct. 5, 1930, Alexander D. Noyes, then the financial editor of The New York Times, reflected on the American economy a year after the great stock market crashes of October 1929. It began:

We have come to a curious turn in the economic road. Things have happened during the past 12 months in our financial and economic history that we had taught ourselves to believe would never happen again.

It sounds eerily familiar, doesn't it? But it gets better. He continued:

We had contrived new formulas for expanding credit which were to make us independent of the vicissitudes and insecurities of other periods. … One of the cardinal maxims of the last three years had been that the "business cycle" was abolished; if, indeed, it had not always been a myth.

Sadly, those words strike a chord with us almost 80 years later. Indeed, if you replace Noyes' early 20th-century references with 21st-century ones, you could swear he was writing today.

Those who do not learn from history ...
In the course of those 80 years, some three generations of Wall Street brokers, analysts, and investors have come and gone. It shouldn't come as a surprise, then, to find that some crucial lessons of the Great Depression were largely forgotten or disregarded by Wall Street -- with tragic consequences.

Despite the fact that our economy has experienced a number of recessions and several periods of volatility since those years, we didn't think we would again see iconic banks like Citigroup (NYSE: C  ) and Wachovia (NYSE: WB  ) essentially implode, nor did we believe we would ever see vaunted investment banks like Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) scrambling for survival.

Why? Because we have powerful government agencies and Depression-era legislation to protect us against full-scale financial disaster. We have bond rating agencies like Moody's (NYSE: MCO  ) and Standard & Poor's -- a subsidiary of McGraw-Hill (NYSE: MHP  ) -- to verify the financial health of CDOs issued by Credit Suisse (NYSE: CS  ) and other reputable banks.

We thought we had, as an economy, learned those lessons. Unfortunately, all of these agencies failed us miserably over the past decade, either from apathy, impotence, ignorance, corruption, or some combination of all four.

We also failed ourselves. We should have known better than to overleverage our personal finances with mortgages we couldn't afford and credit cards we couldn't pay. True, some people were genuinely taken advantage of by unscrupulous mortgage brokers, Realtors, and other salespeople -- but such sales tactics are nothing new. In fact, the very same thing happened in the 1920s:

It was no new idea for energetic salesmen to persuade the customer to buy more than he had meant to buy, perhaps more than he thought he could afford. "Intensive salesmanship" is as old as the [18]50's, but it was certainly never carried to the extremes of 1928 and 1929. The picture presented in the three or four year period before last October was of consumers who were taught, with immense success and with great applause from Wall Street, to buy with money which they did not have.

The parallels are clearer and clearer.

... are doomed to repeat it?
When Noyes was writing, the full scope of the Great Depression was yet to befall the country -- but many of the elements in play then look very familiar: rising unemployment, a government struggling to respond, and a financial system in shambles.

He was encouraged, however, that Americans in 1930 had already begun to discard "completely the dangerous illusions of the past two years and making ready to meet and turn to the American community's advantage whatever realities may be ahead of us."

Something similar seems to be happening today. In fact, in the three months ending in September, American household debt decreased for the first time in more than 50 years. That trend is likely to continue, regardless of the government's many efforts to pump more credit into the hands of consumers. While massive de-leveraging is bad for the economy in the near term, it's what we desperately need if we're to return to healthy economic growth over the long run.

Writing a different future
In the 10 years following Noyes' observations, the stock market remained a roller coaster and, despite some hopeful rallies, never even came close to the highs of October 1929. Indeed, the market's total return from 1931 to 1940 was essentially zero, despite the significant volatility it endured in the meantime.

While I'm not going to try to predict the near-term market, it would serve us well to consider the possibility that the market will provide lackluster returns in the coming years. That makes learning about all of the tools at our disposal -- tools that can help you generate more income, reduce your portfolio's volatility, and increase the benefits of diversification -- even more important.

At Motley Fool Pro, we not only use all of these tools to manage $1 million of the Fool's own money, but we also strive to explain them in plain English so that our subscribers better understand strategies once thought to be "too advanced" for the average investor. We'll be reopening the service to new subscribers soon, so if you'd like to learn more, just enter your email in the box below.

If worst comes to worst, Pro analyst Todd Wenning will raise rabbits and live off the fat of the land. He does not own shares of any company mentioned. McGraw-Hill and Moody's are Motley Fool Inside Value picks. Moody's is also a Stock Advisor recommendation. The Fool's disclosure policy is neither a mouse nor a man.


Read/Post Comments (31) | Recommend This Article (80)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 26, 2008, at 5:36 PM, waynec8 wrote:

    I'm sure it is a good plan but we are 65-75 years old. we have $150,000 to last until the end. There is no longer any room for further mistakes or losses.

    What do we older folks do with our few bucks?

    Just wondering.

  • Report this Comment On December 26, 2008, at 6:05 PM, n40709 wrote:

    It's a shame Congress has their hands in deep pockets. All of these companies contribute large amounts to the Democratic campaigns, The Democrat's in turn, bailed them out. It is so ugly, something had to be done so half of the Republicans voted with them to get the stuff passed. It does not look good for several years in the market and no place to get the returns stocks have provided in past years. You might just stick your money for now in some short term CD's and if you do like stocks. pick some companies that are solid companies and pay dividends. I am in my 30's and lost a lot in the last 6 months. Matter of fact I have lost everything I gained back since 9/11. I decided I cannot pull completely out of the market and have been buying here and there of companies that are paying dividends and been around without all the problems we have been reading about. To name a few, McDonalds, Microsoft, Vector, Lowes and Piedmont Natural Gas.. They all have been slammed except McDonalds and Piedmont. They all pay dividends and have good P/E's. I buy a little at a time just in case things go further south. Hopefully the new administration will keep true to their plan of helping us. But we will have to wait and see. It could be " welcome to the new boss, same as the old boss". People wanted change but change needs to be in Congress, not just the President. We need to clean out the ones in there that have been in for years and have not done anything. Change definitely would have been in Palin, she was the most to normal, income level, working mom and all. But we have to settle for what we can get and just wait and see. Goodluck!

  • Report this Comment On December 26, 2008, at 6:11 PM, kryotex wrote:

    The only way to prepare is work and/or learn ways to become less dependent on energy to run our homes, and back to the land (making your own food).

    I've pulled everything out of the market shortly after signs of the recession and market-crash became recognizable, and moved it all into government-backed, insured bank bonds at 5% interest, for 3years as we get through the worst of the recession to come. My portfolio has been growing since September, slowly, and I'm sleeping at night. Goodluck

  • Report this Comment On December 26, 2008, at 10:21 PM, skully201 wrote:

    Fool Pro tested with 1 mil. Well I do not need another subscription for investment advice. We get a steady stream of offers for yet another newsletter.

    Are you publishers or stock advisers or both?

    Skully201

  • Report this Comment On December 26, 2008, at 11:39 PM, webpilot1 wrote:

    "Ladies and Gentleman, this is your Captain speaking.

    We have detected a little bumpy weather ahead on the radar. We will have to go through it to get to our destination, so at this time please return your seats to their full upright positions and fasten your seat belts. Please keep your seat belts securely fastened for the remainder of the flight.

    The good news is that its sunny with temperatures right at 74 degrees at our destination...so with that said, enjoy a magazine compliments of our staff and we'll be landing at Goodtimes International at half past 2010.

    Thanks for flying with us folks."

  • Report this Comment On December 26, 2008, at 11:47 PM, peaktime wrote:

    RE: On December 26, 2008, at 6:11 PM, kryotex wrote: The only way to prepare is work and/or learn ways to become less dependent on energy to run our homes, and back to the land (making your own food).

    Will SOMEone please explain WHY our government seems hellbent on driving us back to the 1850s? "Less energy to run our homes?" "Make [our] own food?" NUTS! The CITIZENS of these United States must NOT stand for this deviant despotism!

  • Report this Comment On December 27, 2008, at 8:04 AM, FirebirdMan wrote:

    N40709-RIGHT ON!!!! People in Congress have the nerve to make fun of the Presidents low approval rating.. These fools in Congress need to look at themselves because they are the problem!!! "We the people" need to get ride of all these fuddy-dudds and get people like Palin who haven't been corrupted yet.. How do these people get re-elected? The corruption among our polititions are heavy. My 1996 Webster's New World Dictionary defines a politician as " one actively engaged in politics: often used with implications of seeking personal or partisan gain, scheming, etc".

  • Report this Comment On December 27, 2008, at 11:47 AM, fish4uinmd wrote:

    As bad as all the "advisors and brokers and congressional committees" make it sound, I believe that this is an incredible opportunity for young investors. Especially those in their early earnings years.

    There are a lot of quality companies out there...on sale!... paying fair dividends.

  • Report this Comment On December 27, 2008, at 4:22 PM, 181736065 wrote:

    Great article. Just remember that we could go a lot lower.

    Before the heady days of "massive credit expansion growth" PE ratios were routinely around 10. And some are moving to S&P earnings next year around $60.

    Do the math. S&P at 600 or lower very possible.

    .

  • Report this Comment On December 28, 2008, at 4:39 AM, rdhalste wrote:

    Age 65-75...I'm still investing for my future.

  • Report this Comment On December 28, 2008, at 3:57 PM, oldskeptic wrote:

    I'm loosing sight of the difference between The Fool and a host of other services promising access to "the secret" for a fee. This is the second Million Dollars portfolio to be offered. And how many financial newsletters is the Fool up to now?

    I know, I know . . . not everyone is the same, so each vehicle is geared toward differing investors.

    But here comes Pro . . . frankly, what is the idea here? After years of telling us investing is based on solid principles available to all, we learn The Fool has been sitting on a sure-fire, foolproof, risk-free, catch-all methodology that has made them wealthy. And here, now they are going to share it . . . for yet another fee.

    I can't help but be reminded of the questions I have when I get offers for guaranteed returns. If one has that kind of secret, they should have already made the kind of money where their main motivation should now be to retire and enjoy life. And if they retort "we just want to help others get there", my follow-up question is "then why charge for it, and limit it to only a few?".

    I've followed the fool for a couple of decades, and they have helped some, but I increasingly notice a departure from their initial philanthropic way toward something that makes it hard to differentiate them from other advisors. Yes, they are mostly still a cut above . . . but looking less and less as the shining beacons they once where.

    My opinion, of course, is mine alone, and should not be construed as advice or recommendation toward what one should do.

  • Report this Comment On December 29, 2008, at 4:46 AM, GimliJan wrote:

    Hi,

    My First Post! (No Longer a Post-Virgin!)

    I am a new investor that "joined" the MF RYR subscription service. It has given me access to a wealth of information about retirement and investing. I have recently started reading the MF CAPS forums and comments on the articles. I have learned a lot from many of you. Too many to name individually so Thank You!

    I think it's best to read the articles for the information provided and then use the resources, like each other, to learn by discussing the article and offering advice and information that answer's questions posed by us less experienced members.

    Thanks again!

  • Report this Comment On December 30, 2008, at 2:50 PM, new2mpdf07 wrote:

    I'm on board with many others here. Why not offer this advice to people who are already subscribed to one of your other services instead of creating another new service and dipping into our pockets again. Maybe help some of us who are already in the million dollar portfolio get out of the hole we have dug ourselves into?

  • Report this Comment On December 31, 2008, at 8:28 AM, wuff3t wrote:

    "Why not offer this advice to people who are already subscribed to one of your other services instead of creating another new service and dipping into our pockets again."

    Have you ever gone back to the store and said, "You know you just sold me a loaf of bread, well can I have some milk now for free please?" If not then why would you ask this question? Why SHOULD they create another service and give it away for free?

  • Report this Comment On December 31, 2008, at 8:31 PM, FatboyMan05 wrote:

    at a ripe age of 41, in a way I have a 10 year catch up oppurtunity with the market returning zero. I am starting to save like i should have been (work has been saving 10% for me) (nothing like a employers 401 ultimately being worth a bunch of money to get your attention).... only history will tell if I can save and not have job issues I may make the retirement I hope for....

  • Report this Comment On January 02, 2009, at 3:48 PM, jmoule wrote:

    Age 65 - 75: With today's life expectancy tables, you (and I) need to invest so that our money will last until age 95 if not longer. And if you are in that age class, you remember something called inflation and how it really bit us in the 1940s and the 1970s. With all of the government's deficit spending, it's probably coming back. Investing in bonds is not going to get us there.

    I find Hidden Gems to be a good source for ideas on some growth stocks that will produce over the long run. CAPS is interesting, but I wonder to what extent it is beginning to represent a herd mentality.

    Just some opinions based on 45 years of successful personal investment experience.

  • Report this Comment On January 02, 2009, at 5:02 PM, jp0188 wrote:

    This is good your thinking the same thing as me we got to pay for extra info. So why pay for services for retirement stocks and etc. but then you got to pay for what; better info then the first set of people who signed up for infoe I just don't get it they charge for everything in extra info

  • Report this Comment On January 02, 2009, at 9:19 PM, 1mississippi wrote:

    I signed up for RYR and early on made some money with their suggestions. Of course everyone was making money at the time. I then signed up for another service and over the past twelve months have now lost around 30% of my retirement investments. I don't quite get why the FOOL has so many different preminum services we need to subscribe to. I think quantity/profit has trumped service. I have cancelled both of my subscriptions. I will not be so easily "fooled" again.

  • Report this Comment On January 03, 2009, at 1:41 AM, biofest wrote:

    Luckily I have studied history and use no debt except for income earning assets. Banks have always seemed to me to be using a very vulnerable model - lending long and borrowing short. I am 74 and still investing for the future.

  • Report this Comment On January 03, 2009, at 8:43 AM, harrisb69 wrote:

    It seems that all the fatcats are getting a bailout from the gtovernment, but the common person isn't. I guess the only way to get a bailout for the common person is to not pay your taxes.

    One comment stated that the change that was needed is in Congress. He is so right and two of the guys that the change should be applied too are Rep Barney Frank and Senator Chris Dodd. These are only two of the many that need to be kicked out of office.

  • Report this Comment On January 03, 2009, at 9:20 AM, denofhc wrote:

    I've just subscribed to the Fool's Stock Advisor. I'm perplexed that there are so many different newsletters to subscribe to when each one (according to the p.r.) will help me beat the market.

    Fools--which is the single best advisory service out there. Simple is good. I love the forums. But at 60 years of age, I'm not anxious to lose another 40% of my retirement accounts.

  • Report this Comment On January 03, 2009, at 12:02 PM, mercuryfive wrote:

    denofhc,

    maybe Income Investor or Inside Value would suit an investor better who is interested in steady income and wealth preservation (lower risk). Stock Advisor tends to have higher (short term) risk and high (long term) reward picks and would be a good choice for long investments. Besides, individual stock picks will be analyzed and broken down in terms of their risk and reward profile.

    I'm using the services as a starting point and pick only a small number of stocks to actually invest in.

  • Report this Comment On January 03, 2009, at 1:24 PM, Bennerob wrote:

    Most of what we've gotten in politics and the economy is due to classic American voter apathy and disinterest. Voting in more mediocrity a la Sarah Palin should not be the lesson derived from the disastrous 8 years of George Bush. Wake up and pay attention to the great American privilege--and RESPONSIBILITY--that we call "democracy".

  • Report this Comment On January 03, 2009, at 4:54 PM, woolibulli wrote:

    What, all of the Republicans think Sarah Palin would solve our problems, and the Democrats are the root of all monetary evil? I think it's the Republicans that always voted against regulation and for that 'free' market. I think that Palin is another secretive, ideologue that would do more damage to this country. However, if we could sweep away most of the sitting congressmen, INCLUDING Republicans, that would be a great idea. Keep some moderates like Webb from Va that see both sides of the arguments.

  • Report this Comment On January 04, 2009, at 5:55 PM, historyknows wrote:

    Yes, let's vote out all but the moderates on both sides. Especially Sen Kennedy, who celebrates the 40th year of his dodging a manslaughter conviction in his home state!! You or I would be in Jail today!...from news coverage of the incident..."Judge Boyle also said that "negligent driving appears to have contributed to the death of Mary Jo Kopechne".[22]

    Under Massachusetts law, Boyle could have ordered Kennedy's arrest, but he chose not to do so.[22] District Attorney Dinis chose not to pursue Kennedy for manslaughter."

  • Report this Comment On January 04, 2009, at 8:22 PM, philmudge wrote:

    "Because we have powerful government agencies and Depression-era legislation to protect us against full-scale financial disaster". The correct statement should say,"We HAD agencies and depression era legislation to protect us until 1999 when an unholy alliance of congress and the big financial corporations effectively gutted the Glass-Steagall Act". We never learn!

  • Report this Comment On January 05, 2009, at 12:12 AM, trenton1ryan wrote:

    <the possibility that the market will provide lackluster returns in the coming years.>

    Forget the bollocks, the above is all you need to remember.

  • Report this Comment On January 05, 2009, at 5:32 AM, Redrik wrote:

    Well folks, I really liked this article. It added to my knowledge. Best of all, it confirmed my own opinion. How good is that!!

    As for the comments, most are off the subject, being Government and Advisor bashing, but I'll just add a little curry to the debate.

    The Government should not waste taxpayers money on lost causes. Detroit car makers spring quickly to mind. They have squandered many years of opportunities to get their act together, at least in part due to their very short term focus, ignoring the fact that, since WW2 no-one outside the USA wants the wobbly, overweight crap they produce

    Sure the American myopic psyche has always been "the bigger and more garish the better" which when applied to cars is "mines bigger and uglier than yours", but enough Americans have seen other parts of the world and/or discovered common sense and logic, buying fuel efficient vehicles made more economically in the southern states.

    If the American Auto Industry is to survive it must be World Class. Detroit, thanks to weak management and labour excesses must die for the long term good of the nation.

  • Report this Comment On January 05, 2009, at 11:30 PM, TKeith wrote:

    We have been successful investors. I was with ML when I met Tom & Dave at the entry to a bookstore in Seattle. Motley Fools title was genius. I cannot believe a better name could be chosen. They taught the basics of investing so people could learn and make some retirement accounts grow. I began as a CPA, until my wife said, Why don't you get a job you like? I was at ML, after turning down IBM and Blythe & Co. I really like having the opinions of Dave and Tom. They know what is important, and what is not.

    My Rules: no leveraged investing; puts, calls, ETFs, partnerships, etc. Risks are too great and often hid.

    Tom & David have kept us familiar with promising stock ideas, many in their early stages of growth.

    We own stocks all over the world, thanks to them. It is easy to track them.

    Keep the good research ALIVE and well. Get quick profits is a sometime things and you will loose! Buy concepts, not just stocks.

    Good luck with your money management scheme. I would be surprised if it works well, but good luck, just the same. See ya, Keith

  • Report this Comment On January 06, 2009, at 12:19 AM, LarryD40 wrote:

    I am new to MF. I read a comment by Waynec8 written Dec 26 @ 5:36pm and wondered what was the answer, since my situation is nearly identical. Can I be enlightened?

  • Report this Comment On January 07, 2009, at 1:27 AM, Tictictic wrote:

    LarryD40-

    On January 02, 2009, at 3:48 PM, jmoule wrote:

    Age 65 - 75: With today's life expectancy tables, you (and I) need to invest so that our money will last until age 95 if not longer. And if you are in that age class, you remember something called inflation and how it really bit us in the 1940s and the 1970s. With all of the government's deficit spending, it's probably coming back. Investing in bonds is not going to get us there.

    I find Hidden Gems to be a good source for ideas on some growth stocks that will produce over the long run. CAPS is interesting, but I wonder to what extent it is beginning to represent a herd mentality.

    Just some opinions based on 45 years of successful personal investment experience.

    Also,

    On January 03, 2009, at 1:41 AM, biofest wrote:

    Luckily I have studied history and use no debt except for income earning assets. Banks have always seemed to me to be using a very vulnerable model - lending long and borrowing short. I am 74 and still investing for the future.

    Lastly, and somewhat self serving...

    On January 03, 2009, at 9:20 AM, denofhc wrote:

    I've just subscribed to the Fool's Stock Advisor. I'm perplexed that there are so many different newsletters to subscribe to when each one (according to the p.r.) will help me beat the market.

    Fools--which is the single best advisory service out there. Simple is good. I love the forums. But at 60 years of age, I'm not anxious to lose another 40% of my retirement accounts.

    ...too much of being lead around by my MF nose. Can you say disguised infomercial?

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