A Three-Part Strategy to Outlast the Bear

12/01/2008 1:00 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor of MSN Money, lays out what might happen in the market and tells how to prepare for it.

Believe it or not, someday, almost certainly within the next 12 months, the bear market will be over. Then investors will have an opportunity to rebuild their wealth if stocks come roaring back, as they typically do.

I can make a case that we've entered a secular bear market that will run for 20 years or so, from 2000 through 2020, approximately. (Just when I need my retirement money, naturally.)

Why might we be stuck in the early years of a secular bear market?

The world still has more than enough capital to make profit-destroying investments on a huge scale. China, for example, is creating an auto industry that is on the verge of matching the US auto industry for production.

[Also,]  the inability of the global financial system to recycle cash efficiently from the oil and export economies of the world to the world's consuming economies ensures higher interest rates—and slower growth—in the coming decade for the world's developed economies.

[Finally,] economic research links higher economic growth and younger work forces. Unfortunately, the world is aging.

But I can also create a counterargument:

[First,] the world is going through growing pains that will eventually lead to a global consumer economy in countries such as China and India that will drive up the demand for, and the profit from, everything from flat-screen TVs to life insurance.

The replacement of inefficient bureaucratic structures in India, Brazil, and other economies will increase global growth rates and lead to more-efficient allocations of capital.

[And] a better global financial system will rise from the ashes, and capital flows around the world will improve enough to continue the long-term process of making more capital available in more economies at lower costs.

If your time machine, like mine, is in the shop, you'll [need] an investment strategy built on what we do know and what we can't know.

Such a strategy has three parts:

1. Get ready [for] the end of the bear run by putting cash into the sectors that have been beaten down the most in this bear market. Don't stock up yet, though. Build your watch list, research buy candidates until you're comfortable with them and wait for the stock market turn in mid- to late 2009.

2. You can find reasonably safe stocks paying 8%, 10%, or 12% [dividends]. Sure, the price may still have a way to fall, but think of buying stocks with yields like these as buying future cash flow for your retirement portfolio or to use for investments deeper into the recovery.

3. Emerging economies and their stock markets will deliver higher returns [and] stronger growth than the world's developed economies. Investors want to increase their exposure to the world's emerging economies, which deliver more performance bang for less risk than most investors think. As with the first part of this strategy, research now and buy in 2009 or so.

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