With a recession looming on the horizon, investors need to rethink how they allocate their investment dollars.

The American economy looks destined for a major downturn. When that happens, it will turn some of your safest investments into money sinks, and it could make star performers out of otherwise boring stocks. How can you tell the difference? And how can you turn a big problem into a golden opportunity?

What's the problem?

First, learn what's driving the downturn, so you can get out of the problem sectors before they collapse entirely. In the 1970s, there were a couple of oil crises; in the 1980s, the savings and loan scandals wreaked havoc on the economy; and the 1990s served as the prelude to the recent dot-com bust. The Dutch have some stories to tell about tulip bulbs and their fluctuating prices. In each case, the troubled industry took a very hard fall, dragging the entire national economy down with it.

This time, the meltdown started with the air going out of home prices that had been inflated by unsavory lending and borrowing practices. During the last few years, this included 0 percent down payments, interest-only mortgages, and the ability to land big loans without a credit history. Real estate investments looked like money in the bank, creating a subculture of house flippers. That kind of risky business has come back and bit the flippers-and the lenders-hard. Homebuilders are taking a steel bath too, and upscale retailers no longer anticipate that people will take equity out of their homes to buy a luxury car, or a couture collection.

Invest wisely

Instead of "aspirational" purchases, consumers are reaching for smaller flourishes, like a new lipstick, or healthier food. It's a way to look or feel good about themselves without breaking the bank. That's good news for low-end retailers like Wal-Mart, and mid-range specialty stores, such as Whole Foods Market. Those could be good places to park some of your cash while the slow crash is happening.

Another choice is to get out of the stock market entirely. High-yield savings accounts or treasury bills are equivalent to having money in the bank. Just don't forget to take a fresh look at stocks when the worst is over. Buying tech stocks right after the dot-com crash would have been a good move, and the same will be true of banks and builders in the coming years. Let them finish the crash-then, buy the survivors at great discounts.

Dos and don'ts at the breaking point


Here are some tips to help you survive this market.


  • Panic. There'll be sunshine after the rain.
  • Jump on the next big thing, like gold. When they're hot, they're also expensive.
  • Do nothing. The times, they are a-changin', and your investment portfolio must change, too.


  • Your homework. Learn from the ghosts of recessions past, and use the lessons learned to your advantage.
  • Stay invested in something. And stuffing cash into your mattress doesn't count.

Published on March 25, 2008