Strategies for Surviving the Slump

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JACOB THOMAS

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If fear drives you into low-yielding Treasury bills and other quality short-term securities, you'll cede ground to inflation. Long term, blue-chip stocks with good dividends are a better way to go. At 2.3%, the dividend yield on the S&P 500 is about even with the 2.4% yield on five-year Treasury notes. Possible plays: General Mills (GIS) and Anheuser-Busch (BUD) (both yield 2.9%), Verizon Communications (VZ) (4.9%), and Pfizer (PFE) (6%). "Over the long haul, I think stocks will keep up with inflation, though in the short run they can be painful," says Jeremy Siegel, finance professor at Wharton School of Business.

If you're retired or may retire soon, consider immediate annuities that adjust for inflation. The trade-off: Initial payouts are lower than those from a standard immediate annuity. A $100,000 immediate annuity with an inflation rider sold by ELM Income Annuity and backed by Principal Financial Group would provide a 65-year-old woman a monthly payout today of $484.97, vs. $669.80 for the same annuity without inflation protection. But if inflation continues to flare, the adjusted payout will rise and more than compensate for lower initial payments. Certified financial planner Percy Bolton, who heads his eponymous firm in Pasadena, Calif., says immediate annuities used to be seen as a bad thing, "but now we look at them as a buffer to provide an income stream."

BARGAINS IN REAL ESTATE

Are we kidding? Sure, it's definitely harder to sell a home now, and much of the price appreciation of recent years has been wiped out. The good news in the housing market is for those looking to step in and buy: "Just as the upturn was longer than expected, the same thing could happen on the downside," says Dean Gatzloff, professor of real estate at Florida State University's College of Business. Translation: It's a buyer's market for anyone with savings for a hefty down payment and a good credit score. And there's plenty of time to shop around for the right deal. (Also, remember that when there are, say, a lot of ocean and lakeshore properties for sale, it's a safe bet that owners are eager to unload boats, cars, and other items, too.)

Remodeling rather than moving may be another way to make the downturn work to your advantage. The remodeling market has held up better than the housing market, but if history is any guide, this activity will slacken, and that could create opportunity. While the prices of drywall and composite materials are rising, falling demand for new-home construction and plentiful labor mean there's room to drive a bargain on prices rather than plead and cajole just to get contractors to show up or finish a job.

Worrying about your financial survival is smart, but even in tough times, you don't want to shortchange memories. "Kids won't remember that you bought a new car," says Ross Levin, a certified financial planner and head of Accredited Investors. "They'll remember that you took them to the Grand Canyon."

Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online .