I’m Betting On Shares

Earn 2.5% in a savings account or take a punt and stick your money into the stockmarket? Bruce Jackson names 3 big, solid, boring but growing companies for your portfolio.

This recession is going to be long and deep. As I said in my Four Predictions For 2009, I think it will last all of 2009. I think unemployment will keep rising throughout 2009, and I think house prices will fall another 25% to 35%. If you thought 2008 was bad, it will have nothing on 2009.

So what should you do with your money now? If you have money invested in the stock market, one option is to sell up now and put it all your cash in the bank. At least it will be safe there, and can’t drop in value.

According to the Motley Fool’s Savings Comparison Centre, you can currently get around a 4.5% interest rate on your savings. But with base interest rates now at 2%, and set to fall even further, these rates are unsustainable. Come the middle of 2009, I reckon the best savings rates will be around 2.5%.

A Guaranteed Negative Return

Compared to the US, this might be seen as an attractive return. This week, for the first time in history, the auction on short-term U.S. Treasury Bills actually had government debt briefly trading at negative yields. In other words, you’d be guaranteed to lose money when those bills matured.

Granted, the loss will be tiny: According to Bloomberg, someone who invested $1 million at the peak would wind up losing $25.56 on the deal, but it’s still a loss. Has the world gone truly mad? Yep.

My preference is to actually try to make money with my money. It’s a bizarre concept at the moment, and completely out of fashion. Still, fashion has never worried me – you should see my dress sense.

Seconds Out…Round Two

The best way I know to make money is to invest it in the stock market. Granted, that strategy hasn’t worked too well in 2008, but I am not deterred. Call me stupid – and you might be right – but I’m fronting up for another round of man-to-market combat, and this time I’m hoping to come out a little less battered and bruised than last time.

Before I go on, I must first say it is tempting to leave money in the bank account, given 2009 is going to be an economic write-off. Some companies, like Woolworths (LSE: WLW) will go to the wall. Others, like heavily indebted house builder Taylor Wimpey (LSE: TW.) and pub group Punch Taverns (LSE: PUB) are in mortal danger.

Up For The Stock Market Challenge

But I’m one for a challenge. The stock market looks forward. Right now, it can’t see an end to the recession. It is effectively saying many companies will never grow ever again. It just can’t be true. The recession will end. Good companies will grow again. Dividends will rise again. And so ultimately will share prices.

Taken from another angle, many economists believe inflation, not deflation, is our greatest challenge in the years ahead. I’m not talking 2009, more 2010 and beyond. By the third quarter of next year, the cost of money will be down to around 3.5%, including for mortgages. Stimulus packages from the US, UK and Chinese governments, to name just a few, will be in full swing, building roads, hospitals and schools.

In an inflationary environment, or one that fears inflation, there is usually an exodus from low yielding bonds to higher yielding equities. As that exodus turns into a stampede – people love following the crowd – bond yields suddenly spike higher, and that in turn sparks central banks into raising interest rates.

Anyone For A $200 Million Note?

If there’s one thing central bankers hate, it’s rampant inflation. Admittedly it’s an extreme example, but just look at Zimbabwe and its recently issued $200 million note, its 28^th new note this year, as an extreme example of why inflation is so despised.

Back to my challenge. There are two options for stock market investors…

1) Regular, say monthly, contributions to an index tracking fund. If the market falls further, you are averaging down, always a good thing if you expect the market to go higher in the longer-term, which it has done since time began.

2) Pick your own stocks, hoping and expecting your hand-picked portfolio of companies will outperform the returns of the index. Plus, for the thrill seekers of you out there, it’s a little more exciting.

A Little Helping Hand

I prefer option number 2), with a little help from my friends, those being sources like share tipping newsletters and good fund managers. You can go for big, solid companies, mid-cap companies or small beaten up companies. I prefer a good mix, with a preference for the smaller end of scale, as smaller companies give you the opportunity to really generate outsized returns. To offset that, smaller companies generally have a higher level of risk.

Here are just three larger companies I think will offer investors decent returns over the next few years. The added bonus is their high and rising dividend yield, a return that although not guaranteed, is already higher than you can get in the bank. There is obviously a risk of capital loss, but when it comes to stock market investing, that comes as part of the territory.

These are three solid, growing companies. As base interest rates fall to below 2%, something will ultimately have to give. Either dividends are cut or share prices rise. I’m betting on the latter.

More: Four Predictions For 2009

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> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.