How to Invest in the Face of a “Lost Decade”
For most people who are unable to reconcile the prospect of another decade of slow to no growth and mountains of debt, this is terrifying.
But you know what, that doesn’t mean the next decade has to be unprofitable for us as investors:
1) Make damn certain you sit in an exit row. By this I mean make sure you have trailing stops in place that will act as built- in safety brakes if the markets roll over. Nobody knows that they will. I know a lot of people think they will, but that’s no guarantee.
2) Continue to invest but very selectively. Put big, internationally diversified “glocal” stocks at the top of your list and concentrate on those with exposure to defense, bio tech and energy. Favor dividends over simple growth stocks. Even if the markets head sideways for years, the steadiness of international revenues and dividends offers investors stability and upside.
3) Position for fiscal intervention. Whether it’s effective or not is not the question. What you can’t afford to ignore is that it will happen. If Germany’s Angela Merkel and other EU leaders actually succeed in firewalling bad debt off or Bernanke whips a rabbit out of his hat, we could be off to the races — for all the wrong reasons — but off to the races nonetheless. You don’t want to miss that move by sitting on the sidelines.
4) Pick up the must-haves like energy, bonds, metals and biotech. As long as the euro is weak and we’re hobbled by clueless leaders incapable of doing anything other than rearranging the deck chairs on the Titanic, growth will be confined to those holdings that benefit from asset protection rather than output growth.
5) Rebalance quarterly. I know conventional thinking suggests once a year but that’s not wise these days. Why? From 1926 to 1999 the average holding period for an investment was 4 years. Now it’s 3.2 months according to Alan Newman of Crosscurrents. Therefore, it makes sense to shore up underweighted segments of your portfolio more frequently than you might have in the past.
At the end of the day, whether or not we are turning Japanese really doesn’t matter.
What matters is that you stay in the game and be prepared just in case.