By Douglas Goldstein, CFP®

Was the year 2009 a depression or a recession? Whichever it was, it’s likely that your portfolio balances shrunk. While investors are scrambling for a way to regain their losses and protect against further decline, it’s important to ask if the underlying reason for the market’s instability impacts your portfolio.

A depression is an intense, long-lasting recession. A recession is defined by at least two successive quarters of a country’s gross domestic product decreasing. A depression is a long recession that changes economic life, leaving a mark on popular culture.

The difference between recession and depression may not just be the intensity, but also the cause of the downturn. A standard recession usually follows tight monetary policy, while a depression is the result of a bursting credit bubble and shrinking credit. So, the question is, how should you adjust your personal finances if the foundations of the global economy are changing?

First of all, downsize. If you can, minimize discretionary spending and put the extra in savings. This can act as a small insurance policy in case you lose your job or inflation soars. While some analysts say consumer spending is a large force in pulling the economy out of its downturn, it’s not your responsibility to spend in an effort to affect the global economy. The recent recession/depression is resulting in consumption declining for the first time in nearly 20 years. While it’s always fun to buy something new, think twice before pulling out your credit card.

Any economic crisis is a challenge, and adversity presents opportunity. If you can streamline your operations in challenging times, you’ll be in a better position when things begin to pick up. While companies’ downsizing is distressing for the newly unemployed, when companies become more efficient this makes them more valuable when consumer confidence returns and the market responds positively. A company’s downsizing isn’t necessary an indication that you should sell its stock – it may be a wise business move.

Recessions and depression demand different governmental responses, but an individual’s response should be the same: re-evaluate your asset allocation and your spending habits.

Douglas Goldstein, CFP®, is the director of Profile Investment Services. He is a licensed financial professional both in the U.S. and Israel. He offers securities through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.