Is it time to retreat in to the investment bunker and how do you build that bunker?

Next year is looking scary when it comes to investing. Everyday the news out of Europe seems to be getting worse and some are even suggesting the collapse of the European Union by the middle of next year.

Even the American economic recovery is likely to be patchy at best.

Sure the Australian economy is in a much stronger state as long as China keeps buying our minerals and residential property prices stay solid. But the investment ramifications of strife in Europe will be felt around the world no matter where you are.

So how do you prepare.

Before building the bunker it’s worth remember a couple of things.

We love the advice of Warren Buffet from his biography “Snowball”;

. "Cash combined with courage in a crisis is priceless"

. "Don’t invest in things you don't understand"

. "Don't try to catch a falling knife until you have a handle on the risk"

In other words, in times of crisis it’s critical to understand the environment and assess the risks. So it’s all about being careful.

It’s also worth remembering investment markets move in cycles. Every boom will end in a bust and every bust will end in a recovery. The timing of these movements is the unknown.

Markets are driven by the emotions and psychology of those people operating in them. It’s so easy to get depressed at times like this, to think it’s the end of the world and we’re all doomed.

Despite what the doomsayers preach (usually when they’re selling a book based on fear), history tells us that taking a contrary view during a crisis can be the most rewarding time to invest.

“Contrarian Investment Strategies” was a book published in 1998 which analysed 11 major post Second World War crises. It found that a year after each of these crises (with the exception of the Berlin Blockade) the average gain in the US sharemarket was 25.8 per cent and 37.5 per cent after two years.

Since then we’ve had the September 11 attack in 2001 which sent US shares plummeting 11.6 per cent over the following 5 trading days. One month later stocks had completely recovered.

Remember September 15, 2008 when the collapse of Lehman Bros sparked the Global Financial Crisis and the doomsayers were predicting the collapse of the banking system. The US sharemarket dropped 16 per cent in the following year, was down 10 per cent after 2 years and is almost back to that 2008 level now.

Credit ratings agency Moody’s marked the current Euro crisis when it downgraded Greece in April 2010. Since then US shares are up over 10 per cent.

So history tells us to keep these crises in perspective.

Even so, unless you’re a professional and have the skills, it’s a time for us amateurs to tread carefully ahead of next 2012.

So here are our thoughts on bunker investing.

. Family Finances

Keep on top of your debt reduction program and try to build an emergency stash equivalent to 3-6 months salary.

With the chance of a potential credit squeese as a result of banks losing money on their European government bond investments, keep credit lines in place because accessing new loans could be harder and more expensive in the future.

Also job security will be important. So be nice to the boss and make sure they understand you’re a valuable asset to the team.

. Capital Security

When professional investors get scared they flee to safety. For them that means protecting their capital rather than getting the best return. Often they move in to the US dollar because it’s the most liquid market in the world (which ensures accessability) and their is little chance of the US going broke (we’re all in strife if it does).

For us, the equivalent flight to safety is having a foundation platform of investments in bank term deposits, savings accounts and cash.

. Shares

Get advice from your financial planner or broker, but when it comes to the sharemarket the focus should be quality and yield. Big strong companies with a proven track record and which pay good reliable dividends.

Fund managers and brokers also focus on so-called “defensive stocks” which are companies that perform well during economic downturns. Supermarkets (because everyone has to eat), breweries (tough times drive us to drink) and gaming stocks are a couple of examples.

. Property

Like shares, quality and yield are the drivers of property investing during a crisis.

Well positioned easily rented properties should be the focus because these are the properties which hold their value best and also able to be sold quickly.

. Superannuation

Check the investment option you’re in. The closer you are to retirement the more conservative the mix of options. Balanced, fixed interest and capital secure provide the best protection in a crisis.

. Gold

The precious metal has traditionally been a great store of value against economic and financial upheaval. But it can also be a currency play against fluctuations in the US dollar.

Gold bugs swear by the metal but it can have a life of its own which doesn’t always go according to plan. Even so, it’s certainly worth holding some gold in a portfolio.