There are plenty of signs that we are heading for an extended recession, and that it will take five years to extract ourselves from it. I hope this reading is wrong, but it is likely, because the consumers of the world are in debt, out of work and out of money. And those who are better off are afraid to spend and are saving up their money.
If this is the environment we live in, then how should we be investing our savings? As usual, that depends on your financial position and your emotional condition. For those of you with substantial assets and a confident nature, you will want to commit some money now to sound investments at bargain prices, and hold other funds liquid so you can take advantage of opportunities that should present themselves over the coming months and years. So review your portfolio, create some liquidity by selling the weakest holdings, and hold some cash reserves awaiting even better entry prices.
For those with less funds or less confidence, the investment choices are cash equal to two years’ worth of spending, government and corporate bonds of six year maturities or less, and dividend-paying defensive stocks. In this latter category, we prefer large established corporations in non-cyclical industries providing goods and services that are necessities of life, such as basic foods, toilet articles, medical services, mobile telephones… They should have strong balance sheets, manageable debt, solid cash flow and a sustained record of dividends and dividend growth.
In this type of portfolio, you may experience some losses, but they will be half what the general market looses and they will recover over time. In addition, the stocks will pay handsome dividends which will provide cash as needed and which will replace any lost capital promptly.
So these are very uncomfortable investment markets, but you have to place your money somewhere. Buying cash deposits is a losing game, both in the interest returns (± 2%), and the after-tax results (-48%). In addition, inflation will eventually reduce those returns to negative numbers. So this is a time to stay invested in a defensive position, and keep optimistic that sanity will return to the financial world.