Three simple things to batten down your portfolio.
Think the FTSE 100's eight month 47% rally is safe? If you do, then you're in the minority.
A recent Bloomberg survey found that only 31% of respondents see investment opportunities; that's down from 35% in July. The picture is even worse in the US, where more than 50% said they are breaking out the riot shields and getting defensive.
Why all the worry? The pace and size of the rally is a big factor, since valuations are suddenly nowhere near as attractive as they were earlier this year. The memory of the financial meltdown is also still fresh, leading many to look at improving economic indicators with a healthy dose of scepticism.
In the US specifically, there is a lot of concern over unemployment -- a quarter of the participants in the Bloomberg survey see the US. unemployment rate at 11% or more a year from now. And fretting over the US dollar is undoubtedly playing its part.
Add this all up and you've got a very uneasy market that could get pessimistic enough to flip from rally to rout.
But now's hardly the time to start chewing your fingernails and taking up afternoon drinking. There are some simple things you can do to batten down your portfolio.
Sell Now!
No, I don't mean everything. But many of us have shares we've been holding onto for the wrong reasons. Maybe it's the classic "just waiting to get back to even," or maybe it's simply a case of portfolio paralysis. Whatever the case, if there are shares in your portfolio you're unsure about, now may be the time to cut them loose.
Maybe it's a retailer like ASOS (LSE: ASC), whose valuation makes you uneasy, or perhaps it's a financial like Royal Bank of Scotland (LSE: RBS), whose future is highly uncertain. It can be tough enough to see a share decline when you have confidence in it, but there's little solace when you're on the losing end of a company you didn't really believe in the first place.
So go ahead, take a moment, be honest, and look through your portfolio for shares you're holding for the wrong reasons. I'll wait right here for you.
Buy Now!
Back? OK, now that you've cut the fat from your portfolio, it's time to get some shares in there that are not only well-positioned for the current market environment, but also poised to outperform over the long run.
One option is to look to large, stable companies that we can depend on to perform regardless of what the economy is doing. It doesn't hurt to add the additional criteria of a decent dividend, so that you get paid no matter what the market is doing. Companies like Unilever (LSE: ULVR) and Diageo (LSE: DGE) are two great examples in this category.
Another option is to follow the suggestion of those Bloomberg poll-takers and scout out the emerging markets. Bloomberg noted that respondents saw the most potential in high growth markets such as China, Brazil, and India. Companies like GlaxoSmithKline (LSE: GSK) and even Vodafone (LSE: VOD) give you exposure to these economies.
A final area that shouldn't be skipped is commodities. Overlapping with the emerging market growth theme, commodity producers like BHP Billiton (LSE: BLT), Vedanta (LSE: VED) and BP (LSE: BP) stand to reap the rewards of spiking demand for commodities as high-growth economies kick into high gear. As a bonus, the commodity products that these companies sell are also a hedge against inflation.
Be Contrarian
It'd be silly to think that every share will suffer just because the global economies are facing some headwinds. It's very likely that some investors will be handsomely rewarded for picking spots to go against the grain and invest in questionable industries like retailing or finance.
Maybe, for example, you believe that unemployment can't dampen the appeal of a couple of beers with some a cheap meal, and therefore JD Wetherspoon (LSE: JDW) will continue to charge ahead. Or maybe you're convinced that Prudential's (LSE: PRU) high-quality franchise will help it prosper in the new world of insurance and finance.
The bottom line is that the spectre of another dip in the markets isn't a cue to run for the hills. It is, however, a good reminder to check the state of your portfolio and make sure you're not sitting on a heap of shares you just "hope" will go up.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who has an interest in GlaxoSmithKline.
