We've locked in a "lost decade" in the first decade of this century - essentially a decade with flat or negative returns in the broad market. I'm of the opinion that we will have yet another lost decade (note that Japan has consecutive "lost decades"). Without going into detail, I believe a number of factors will force us into a lost decade including a de-leveraging economy, high government debt levels and a shift in American attitudes towards saving and spending.
So, how do we invest in a time period where we anticipate another lost decade? At this point, I wish to explain that even if you disagree with me on the macro-backdrop in which we're investing, the following insight might still be beneficial as you map our your investing strategy.
What Wall Street Wants You to Do
Many will be tempted to simply move forward on schedule, investing a little bit each month in diversified mutual funds and broad market indexes. This is one approach you can take, but it's not my favorite approach. Wall St. prefers this approach because it ensures maximum dollars invested at all times which generates more and more fees for them.
While this isn't my approach on an overall strategy, it is my approach with my DRIP stocks (DRIP = Dividend Reinvestment Plans). My DRIP stocks right now are only McDonalds (MCD) and Wal-Mart (WMT). These positions are ones that I'm committed to building on a regular basis no matter what the market is doing. (For more information on why I like each of these stocks, click here.)
A Conservative Approach
If we're anticipating a true "lost decade" where we either lose money or earn no return on our money for a time span of ten years, then obviously, a conservative approach is recommended. In such approach, I believe we should exercise extreme patience and wait patiently for entry points in sectors and stocks that are somewhat resistant to a low growth economy. In addition to the DRIP names I mentioned above, other defensive areas might be consumer staples such as Philip Morris Int'l (PM) and healthcare such as Pfizer, Inc. (PFE).
While I've offered some potential areas to invest in a weak economy, I don't recommend allocating all your money immediately to these areas. As I said, extreme patience is my recommended approach. If that means sitting in high levels of cash for a prolonged period of time, I find that acceptable since capital preservation is our number one goal.
If you haven't noticed, significant drops in the stock market have become a fairly common occurrence in the last decade. If we believe this trend is to continue, we can expect a time in the next few years where stock prices will drop significantly. I wish to position myself accordingly to maximize this as an opportunity, not a crisis. By waiting for such a moment, we can buy quality companies and very low entry points. This serves two purposes: a great point for capital appreciation and a higher dividend yield based on a depressed stock price. If no crash comes, I'm content with cash and other dividend positions. If the last few years are any indication, I think another crash (or maybe just a drop) is definitely likely.
Focus on Income
If and when these entry points arrive, we will pile our cash into high yielding names that have a history of continuous dividend increases and a history of consistent earnings. The focus on income will provide us with fantastic cash flow in a period of little to no growth.
In summary, my strategy over the next decade is as follows:
- Cash - Having a significant part of my portfolio in cash ready for deployment in a very attractive investment opportunity
- Patience - Waiting for a significant pullback in the market - I'm willing to risk losing a quick short move higher for the opportunity of truly attractive entry points
- Dividends - When we do pull the trigger, it will be quality dividend companies with increasing dividends
Disclosure: Author long PM, WMT and MCD