This week the Chartered Institute of Personnel and Development issued the results of a chilling survey. It found that 49% of state workers in the UK are prepared to do what’s needed to ‘protect their jobs – even if that disrupts public services’.
Now I’m writing this from an airport in the south of France. And for the last week all I’ve read in the British broadsheets are gleeful reports about the French bringing their country to a standstill. How the lazy good-for-nothing French are rioting because they have to do a little extra work.
I looked at the photos of French cars in flames and police confronting blockading workers. And all I could think was – we have no idea what we are in for.
Because this isn’t the end of the rioting. Not for the French. And not for British state workers either. The Chartered Institute survey shows that.
So you will need to take steps to protect your wealth. Radical steps. And today I’d like to recommend three to start with.
An unwelcome dawn
As you read this I should be on a plane and you should be getting some detail on the government’s comprehensive spending review. I don’t think there’ll be anything earth-shattering here. From where I’m standing these cuts really just amount to a slowdown in the growth of our public spending.
But the big thing here is the new dawn that it ushers in. The moment has come to take a long hard look at our society. And this is something that’s going to go on for at least a decade.
Here at The Right Side we want to avoid the fallout. The bottom line is that the French are fighting the same issues we’ve got. And the biggie seems to be working longer – referred to euphemistically as pension reform.
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To listen to the French media, you’d think that we were talking about modern day enslavement. But in the UK, the media just hasn’t cottoned on to this massive structural problem.
This is a problem that could take twenty years to sort out – if it ever does get sorted out. Up until now the issue over pension reform has been covered up in two ways.
First the state has just carried on making the same absurd pension promises to state workers. They’ve ignored the obvious demographic implications.
Secondly they’ve been borrowing to pay for the shortfall to fund pensions.
The days of this scam are numbered. They know they can’t afford these pensions today and they certainly can’t afford them over the next twenty years or so.
It’s time to take cover.
Three steps to avoiding the meltdown
As people take to the streets, our economy will suffer. Even employers that can keep their workers enthused will suffer as key services go off-line. Transport and utility hiccups are the obvious contenders to mess up business.
Stock markets will be in the firing line. In fact stocks can get smashed in a downturn; we don’t have to go further back than a couple of years to see that! Stocks get hit because their value is based on multiples of earnings.
With stocks, we try to make an assessment of how much profit they’re likely to make over the next ten to 20 years and then calculate a stock price. If investors lose faith in the economy, and earnings estimates go down (or earnings turn to losses), you can expect savage cuts in stock market indices.
So what should you do? Well first, diversify your assets. I’ve been advising you to diversify into assets other than stocks for a while now. Commodities, gold and alternative assets (even fine wine like I mentioned before) can provide a much needed sanctuary.
Second, choose your stocks very, very carefully. Diversified global earnings is the key to reducing risk. The pharmaceutical industry and oil are two obvious examples of sectors with a global presence that we’ve mentioned before.
Finally, for those stocks that remain in your portfolio, it’s essential that they pay a decent yield. That’s what’s going to provide a prop to the share price. And next week, I’ll be writing to you with details of one sector that I’m certain will provide this prop.
For further specific advice on how to build a defensive portfolio with a high yield, The Dividend Letter is a great place to start. Run by my colleague Stephen Bland, his high yield model is extremely well positioned for any coming turbulence.
In Stephen’s words, “I haven’t got a clue where the FTSE is going – and I couldn’t care less”.
To find out more about how Stephen can afford this ambivalence, and why you need some of his stock market insights, just follow this link.
• This article was first published on 20th October in the free investment email The Right side. Sign up to The Right Side here.
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