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Can You Profit From a Financial Apocalypse?

Pain at the pump. Soaring food prices. Plummeting stock markets and housing prices.

Add 'em all up, and it sure seems as if the sky is falling. But you can't respond to gloom and doom by giving up on your retirement investments. Instead, your ultimate investing success depends on your confidence that people will adapt in the face of new challenges -- and find ways to prosper.

The end is near?
In a recent update on The Motley Fool's Rule Your Retirement service, retirement expert Robert Brokamp noticed that extremely pessimistic predictions are appearing in greater numbers. Books such as Michael Panzner's Financial Armageddon point to huge personal-debt levels, government budget deficits, broken promises from corporate retirement plans, and the overwhelming size of the derivatives market in predicting a breakdown of the financial system.

Yet as Robert points out, we've been through all of this before. In the 1970s, double-digit inflation joined hands with a slowing economy to knock stocks for a loop. Before the crisis was done, mortgage rates rose above 18% -- bond investors suffered as well -- and oil prices climbed from single digits to around $40 per barrel.

The problem with doomsday predictions is that in the end, no one profits from them. After all, if financial systems do completely collapse, then paper profits on gold stocks or stock-index put options won't really be worth anything -- and you'll have a lot more pressing concerns than trying to collect a bunch of worthless greenbacks from your broker.

In contrast, investors who profited most from the difficulties of the 1970s didn't focus solely on the crisis itself. They also believed that people would find solutions to the problems the world faced -- and invested their money in those solutions. That turned out to be a far better long-term strategy. As the overall market did well in the subsequent years, oil stocks such as BP (NYSE: BP  ) stayed in the doldrums for years to come.

A grain of salt
You need to be aware of changing conditions so you can figure out which of your investments are most vulnerable and take appropriate action.

Hard times don't always mean bad news for business, after all. Shifting economic trends present opportunities you should take advantage of in your investing strategy. For example, cheaper labor in emerging-market countries such as India led many U.S. companies, including Honeywell (NYSE: HON  ) , Cisco Systems (Nasdaq: CSCO  ) , and Oracle (Nasdaq: ORCL  ) , to cut costs by working with Indian businesses and outsourcing some of their operations in recent years. Rather than simply accept higher labor costs at home, these companies jumped at the chance to become more competitive.

Similarly, you can take advantage of trend shifts in your portfolio. In the current energy crisis, for instance, oil and gas stocks have performed spectacularly. Figuring out how to profit going forward, though, requires thinking about how the industry will respond. If more areas are opened to drilling, then seismic-data providers such as Dawson Geophysical (Nasdaq: DWSN  ) should see continued growth. On the other hand, if a new energy policy favors sources other than fossil fuels, then solar stocks such as First Solar (Nasdaq: FSLR  ) and Evergreen Solar (Nasdaq: ESLR  ) will have a chance to justify their high current valuations.

Don't bet on doomsday
As you can see, the exact steps you should take to profit from hard times aren't perfectly clear. But the general philosophy of looking at how companies will solve problems is a valuable one for investors to keep in mind. By investing in stocks that you think will find the solutions to the challenges we face, you'll get the most from the happy days that are yet to come.

For more on investing in tough times, read about:

Planning for retirement requires a certain amount of optimism. If falling 401(k) balances have you singing the blues, get a pick-me-up from the Rule Your Retirement newsletter service. We'll help keep you positive with thoughts on the current market, investment tips, and much more. Try it free for 30 days, and see whether you feel better about your money.

Fool contributor Dan Caplinger has a few gold coins, but his basement is free of guns and ammunition. He doesn't own shares of the companies mentioned in this article. Dawson Geophysical is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy may not survive Armageddon, but it should last a good long time.


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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 August 04, 2008, at 11:31 AM, brainofjfk wrote:

    This article makes me laugh.

    It sounds as if it is a corporate bank trying to save itself. Like the article itself is trying to stand in front of the doors on these numerous bank runs and bank failures. Please keep investing, leave your money in the system, trust us.

    As we all know the Federal Reserve is a private corporation run in the best interests of corporate bankers not the people.

    This has happened before and it was called The Great Depression. Many people today do not have family members that can tell them what it was like.

    Do you know what my great grandmother from Sicily told me? Banks were evil and to keep my money under the mattress as she lived through the Great Depression. She lived thru the time when everyone knew that banks were evil and could never be trusted. I always thought she was a kook.

    Then I learned two things. One is that the federal reserve is a private corporation un for the profit of the banking elite and two that the there is no law requiring you to pay taxes on you labor or wages.

    Once you discover those two facts all financial distress for the average person in America becomes clear. It is a plan, it is by design and it is for the profits and pockets of the rich elite bankers.

    If you would like to help people by writing articles and protecting banks I guess that is your right however irresponsible it may be.

    If you feel like telling people really what is up with their government you can easily go to youtube and research these titles.

    money as debt

    zeitgeist the federal reserve

    freedom to fascism

    until the amercian people get out from in front of the tv and learn why they are working harder for less and less the economy will just be a plaything for the rich.

    more people are waking up to the truth everyday and WE THE PEOPLE will not forget. You will be called out.

    So you have a choice to stand with the people of the United States or stand with the corporate elite.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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