Even Ben Bernanke has no idea what the economy will do next. In a recent testimony before Congress, the Fed chairman called the economic outlook "unusually unclear." His view appears to be the consensus, as few economists seem to know for sure whether the economy will break free of the recession's grip, or whether a double-dip occurrence is right around the corner. And thanks to all this uncertainty floating around in the economy, millions of Americans are feeling more insecure than ever.
Cloudy future
According to a new report from the philanthropic Rockefeller Foundation, economic insecurity is at a 25-year high. The report reveals that one in five Americans are estimated to be "economically insecure," defined as those whose available household income fell by at least 25% after adjusting for inflation. Furthermore, the report revealed that in recent years, economic security has not returned to prior levels between downturns. That means each new economic cycle has brought with it an increasingly higher level of economic insecurity.
But most folks probably don't need a report to tell them that times are tough, or that the outlook ahead is uncertain. Millions of us are dealing with these truths every day. And while I still advise investors to keep focused on their long-term investment plans and asset allocation, there are steps you can take to bolster your portfolio for the "unusually unclear" economic period ahead.
The dividend's the thing
While most investors' first reaction to uncertainty is to ditch the market and camp out in ultra-safe Treasury bonds, I don't recommend fleeing the scene entirely. Despite their abysmal track record over the past decade, stocks are still the most likely vehicle to provide the long-term growth all of us need to meet our long-range goals. But, you've got to be smart about stock selection.
One of the easiest ways you can solidify your portfolio is by investing in dividend-producing stocks. Why wouldn't you own a stock that repays you not only with capital appreciation, but also with a recurring cash payment? Dividends have slowly been coming back into vogue, as investors rediscover the appeal of safe, secure blue-chip names, rather than the high-beta stocks that have dominated much of the market recovery since March of last year.
To get wide-ranging exposure to a diverse collection of dividend-paying stocks, your best bet is a low-cost exchange-traded funds such as Vanguard Dividend Appreciation ETF
If you're looking for individual dividend-producing names, a few sectors should do well in the near future, including health care and consumer goods.
As the population ages, and demand for health services and prescription drugs grows, pharmaceutical firms should see increasing demand for their products. Merck
On the consumer-goods front, if the economy slips back into recession, or even just bounces along in a low-growth recovery period, companies that produce and sell basic consumer necessities should do well. After all, people need shampoo and cereal, no matter what the level of GDP. Here, Procter & Gamble
Trends are not your friend
In uncertain and economically insecure times, investors will be tempted by the latest investment trends. Although it may be enticing to latch on to the latest hot asset class or group of funds, don't fall prey to trends. Don't buy triple-leveraged inverse exchange-traded funds in the expectation of making some quick money to replenish your portfolio.
The same goes for buying the hottest of hot recent investments: gold. Don't stash half of your portfolio in gold with the expectation that recent returns are going to repeat themselves and that you'll make a killing on this shiny metal. The risks of a large exposure to gold at this price are greater than the potential rewards. However, if you want to own gold as a long-term portfolio hedge, buy a low-cost exchange-traded fund like SPDR Gold Shares
While the next few months may provide more clarity as to the direction of our economy, it will likely take many years for unemployment to work its way down and for Americans to begin to feel more economically secure again. In the meantime, investors can adjust to the new reality by aligning their portfolio more closely with those companies that stand to benefit the most from these challenging and uncertain times.
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