Investment strategies in a sluggish economy

Penny on stock chart
  • A conventional strategy involves a simple 60/40 stock and bond portfolio.
  • Master limited partnerships have high yields, but complicated tax rules.
  • Foreign bond funds provide diversification but can be quite volatile.

Is the United States headed for a lost decade as far as the economy goes? And if so, what are the best investment strategies to deal with that torpor?

There is precedence for wasted economic decades. It happened in Latin America amid the region's debt crisis in the 1980s, and it's been going on for more than 20 years in Japan, which still hasn't recovered from its bubble economy of the 1980s.

The U.S. economy is struggling to emerge from the 2008-2009 financial crisis after binging on debt and conspicuous consumption. Gross domestic product rose at an annual rate of 1 percent in the second quarter of 2011, according to the Bureau of Economic Analysis. It edged up just 0.4 percent in the first quarter.

"Our concern is that there could indeed be a lost decade," says James Holtzman, a shareholder at Legend Financial Advisors in Pittsburgh.

Chris Litchfield, a private investor in Stamford, Conn., who formerly ran a hedge fund, estimates based on historical stock market patterns that the bear market that began in 2000 will last through 2014, providing an average annual return of about zero.

Whether our economic and financial morass lasts another four years, 10 or whatever period, experts recommend several strategies to weather the storm. There is one overriding imperative, they agree. "Diversify, diversify, diversify," says Holtzman. Here are seven different ways to do that.

The most basic strategy

It doesn't have to be complicated. Investors could stick all their assets in just two mutual funds or exchange-traded funds: a broad stock index fund and a broad bond index fund, says Ethan Anderson, senior portfolio manager at Rehmann Financial in Grand Rapids, Mich. Rebalancing this portfolio once a year would be fine for the average investor, he says.

The idea, of course, is to buy low and sell high. So after each year you might want to sell some of the fund that has performed best and buy some of the fund that has lagged, perhaps keeping your weighting at 60 percent stocks and 40 percent bonds. That's the rule-of-thumb asset-allocation strategy for investors far from retirement.

You might want to vary your weightings if you think one fund is likely to far outperform the other, perhaps because it has lagged for a sustained period.


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