SAN FRANCISCO (Dow Jones) -- Investors can be forgiven for losing faith in the financial markets. Only a year ago there was reason to believe there was light at the end of the tunnel. In truth, it was an oncoming train.

Now we face the worst economic times since the Great Depression. The coming year will bring more job losses, bankruptcies, foreclosures, cutbacks. Consumers and companies will spend less, dig out of debt, save what they can. The incoming administration of President-elect Barack Obama will try to do its part -- keeping interest rates low, funding job-creating projects and printing money to stimulate the contracting economy.

Recovery will take not months, but probably years. The age of austerity has replaced the age of avarice, and we will have to adjust purse strings and investment portfolios accordingly.

A sea change in the global markets was evident more than a year ago when MarketWatch reported on 10 investing ideas for 2008. Recession was on the horizon, and a defensive stance was in order.

Yet few experts spotted the economic tidal wave that has destroyed so much wealth. Most of the investment strategies that MarketWatch's suggested last year were taken to the woodshed with just about everything else.

After such a devastating year for stock investors, the idea of putting money into anything other than cash must seem like advice out of left field. But there are investments that can stand up to whatever 2009 deals and allow you to ride out the recession intact, if not in the money. Most of these themes are designed to generate yield -- reliable income that acts as a rudder in choppy markets.

Some appeared on last year's list, and are back because the economic coast isn't anywhere near clear. Keep in mind that these recommendations are long positions and meant for broadly diversified portfolios. Short-selling stocks and buying bear-market mutual funds is certainly an option, and has been lucrative, but requires a different mindset than many individual investors have.

Above all, watch for signs in 2009 that big institutional investors in particular are willing to take more risk, such as a rebound in economically sensitive industries, higher-end retailers, small-cap stocks, municipal bonds, commodities, and emerging international markets. That seems unlikely for at least the first half of the year, but if and when it happens, become less defensive and start to go with the flow. Just don't get carried away.

"We've seen things happen this year that people have never seen in their lifetime," said Michael Kuziw, senior vice president of asset management at investment manager Lenox Advisors. "It's hard to go into 2009 and say 'this is where the opportunity is going to be.' You have to be more conservative and diversified, and try not to make any knee-jerk reactions."

With that in mind, here are 10 ways -- combining defensive and proactive strategies -- to position your portfolio for the next 12 months:

1. Buy long-term Treasury bonds

One of last year's recommendations, Treasury bonds are in a bull market and, many experts say, overvalued. Three-month obligations yield virtually nothing, and even the 30-year bond pays less than 3% interest.

The overvalued camp probably has a good case, yet securities can stay overvalued for quite some time as long as conditions warrant. Treasurys aren't in a bubble, at least not yet.

There's opportunity in Treasurys for much of 2009, if you focus on longer- dated bonds, says Merrill Lynch economist David Rosenberg. The reason: Deflation.

The worldwide deleveraging, what some are calling "The Great Unwind," is crimping consumer demand. Consequently, prices are falling and people are deferring purchases, expecting further markdowns. In this environment cash is king, and so are bonds that provide steady streams of cash.

"In a deflationary backdrop, there are only three investment characteristics that make sense: income and income growth, safety, and duration," Rosenberg wrote in a recent research note.

"Duration," in portfolio-speak, refers to a bond's sensitivity to interest- rate movements. When rates decline, as they've been doing, more volatile longer- dated bonds appreciate most.

"This is why we still favor long Treasury bonds," Rosenberg noted.

2. Add investment-grade U.S. corporate bonds

The credit crunch has created extraordinary bargains in top-quality U.S. corporate debt. The market is pricing A-rated or higher debt as if the underlying companies are on the brink of bankruptcy, pushing risk premiums skyward.

As investors become less fearful and begin to shoulder more risk, they'll embrace the debt obligations of the biggest and best U.S. businesses. Prices for these bonds would then rise and yields decline.

For now, these issues provide several percentage points more in yield than Treasurys. Plus, bonds are safer than stocks: If a company does fail, creditors are paid before stockholders.

"Corporate bonds offer unprecedented yields," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates in Toledo, Ohio. "I feel a lot more comfortable in the corporate bond area than I have in a number of years, and that's going to be a big factor in outperformance in 2009."

3. Favor U.S. stocks over international

The U.S. has been officially in recession for a year now, and much of Europe and Japan are in similar straits. But Washington's response to the downturn has been more aggressive and broader, and the U.S. economy should find its footing sooner than others.

"We see the U.S. better equipped to outperform its peers in 2009," said Larry Adam, U.S. chief investment strategist at Deutsche Bank Alex, Brown, in a research note to clients.

U.S. stocks, he added, are poised to rebound in the second half of the year as corporate earnings stabilize and investors start to focus beyond the recession. "A low-interest-rate environment, decelerating inflation and a modest boost in consumer confidence over the course of 2009, should all be supportive of P/E expansion," Adam noted.

In large part, any relative strength of U.S. stocks hinges on the massive domestic spending that an Obama administration promises. U.S. companies involved with engineering, construction, productivity-enhancing technology and alternative energy would be prime beneficiaries.

"We suggest that investors focus on larger cap companies that generate most of their revenue in the U.S.," said Brian Belski, Merrill Lynch's chief U.S. sector strategist, in a recent report. "The negativity in equities is well understood and more than reflected in current prices," he added.

Indeed, the Merrill Lynch strategist sees the benchmark Standard & Poor's 500 Index (SPX) reaching 1,000 by the end of 2009, in line with S&P's own 1,025 target and reflecting an almost 18% gain from current levels.

4. Stay defensive with consumer staples stocks

Americans' personal savings rate is up and moving higher, and with people concerned about job security and their ability to make ends meet, thrift has replaced spendthrift.

"This is proving to be the most intense U.S. consumer recession of the past six decades," Merrill's Rosenberg told clients. "We expect this recession to last through to the end of 2009/early 2010 before an 'L-shaped' recovery takes hold."

Accordingly, investors should stay defensive in shares of companies that make the products people need, rather than want. Food, beverage and other consumer staples companies should also benefit from commodity-price deterioration that lowers production costs and improves profit margins. Plus, people aren't dining out as much, and so will spend more on packaged goods and home entertainment.

For Belski, this new frugalness favors companies such as discount retailer Wal-Mart Stores Inc. (WMT), Comcast Corp. (CMCSK) and General Mills Inc. (GIS).

5. Stick with health-care stocks

Health-care reform is expected to be a top priority for the Obama administration, but reducing costs and expanding access is not necessarily an industry-breaker. In fact, the health-care sector, with its defensive investment characteristics, offers the best values in almost 15 years, Belski noted.

"Health care is one of the few sectors that has exhibited solid earnings growth, an accommodative macro environment and an attractive valuation backdrop, " he wrote to clients.

Analysts at Standard & Poor's, meanwhile, also have a good prognosis for health-care stocks. Their strong buy recommendations include pharmaceutical giants Abbott Laboratories (ABT), Bristol-Myers Squibb Co. (BMY) and Johnson & Johnson (JNJ). Other favorites: biotech leaders Genzyme Corp. (GENZ) and Celgene Corp. (CELG)

6. Connect with utilities and telecom stocks

If you're looking for predictable dividend payouts from an investment -- and in 2009 you should be -- shares of telecoms and utilities are among the best sources. And, crucially, these businesses have pricing power at a time when many companies don't.

"You're going to get a good dividend, and they're stable and more conservative," said Lancz, the Ohio investment adviser. His clients' portfolios include utilities CH Energy Group Inc. (CHG), Nisource Inc. (NI) and Portland General Electric Co. (POR)

He also predicts that many utilities will become merger and acquisition targets. "You're going to see more M&A activity in that area, and at huge premiums," Lancz said.

As for telecoms, investment manager Steve Neimeth favors AT&T Inc. (T) for the SunAmerica Value Fund (SSVAX) he runs. While he concedes that earnings could be flat for several years, AT&T's yield, at close to 6%, is "extremely attractive."

7. Embrace companies with rising dividends

High-yielding stocks can be dangerous -- just look at the financial sector. Instead, you want cash-rich companies that have steadily increased annual payouts in good markets and bad.

"In a market that's going to be volatile and where it's going to be hard to make significant advancements over the short term, dividends are going to be a key component to investment success in 2009."

As examples, Lancz points to a couple of health-care favorites -- Pfizer Inc. (PFE) and Merck Co. Inc. (MRK)

8. Count on businesses in strong financial shape

In this increasingly Darwinian market, companies that can hold up better than their competitors will come out stronger once the economy recovers. Fortunately for investors, top-notch companies with solid finances and a leading share of their industries are on sale.

"Stick with quality," said Bob Doll, global chief investment officer for equities at BlackRock Inc. "You want companies that have some independence of the economy. Those are companies that have decent balance sheets and good free cash flow."

His suggestions include Johnson & Johnson, Hewlett-Packard Co. (HPQ) and energy giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX).

For Lancz, there's opportunity in some selected, beaten-down technology companies, namely Microsoft Corp. (MSFT), Apple Inc. (AAPL), Google Inc. (GOOG) and EMC Corp. (EMC).

9. Be selective with municipal bonds

State and local governments have been broadsided in this recession, and there's growing concern about further downgrades and that more than a few municipal-bond issuers might actually default. Such fears have frozen the muni- bond market, depressing prices and making the yields on these tax-exempt investments extremely attractive compared with Treasurys.

"The municipal-bond market has seen unprecedented downgrades and represents significantly more risk than in the past. Municipal bonds are no longer the safe harbor they used to be," said Warren Pierson, co-manager of Baird Intermediate Municipal Bond Fund (BMBSX).

As with investment-grade corporate bonds, munis will start to gain traction once investors are willing to take more risk. Until then, be selective. Pierson looks to pre-refunded bonds, which are essentially secured by Treasurys and better insulated from volatility. Or stick with state general obligation bonds rather than local issuers that might not be as creditworthy.

"There's a lot of good situations to take advantage of in the municipal market, just like in the corporate market," Lancz said. "We're sticking with higher quality that might be priced erroneously."

10. Tiptoe into TIPS

Treasury Inflation Protected Securities, or TIPS, which are geared to combat inflation, haven't seen much demand when most investors are expecting an extended bout of deflation.

Deflationary pressures are surely weighing on the economy. The huge amount of money that Washington is throwing at the problem -- the Obama administration's two-year stimulus plan could approach $800 billion -- has one overarching goal: To get America moving again.

So here's a not-so-wild card to consider: Inflation expectations grow faster than most people think.

"If policymakers are successful, inflation could become the predominant threat once the global economy starts to recover," Larry Kantor, head of research at Barclays Capital, noted in a recent report.

In that case, "TIPS look interesting," said investment strategist Ed Yardeni, president of Yardeni Research Inc. "With energy prices coming down, the perception is you don't need protection against inflation. But if you don't think we're going to have deflation, those yields are pretty attractive."

  (END) Dow Jones Newswires
  12-29-08 1117ET
  Copyright (c) 2008 Dow Jones & Company, Inc.

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