My 'Druckenmiller' Investing Game Plan: 3 Ways of Adjusting to the New Reality

In my Friday column, I highlighted several of famed billionaire Stanley Druckenmiller's current views on the markets.

One of Druckenmiller's views is that equities will trade sideways over the next decade with sporadic bouts of volatility. I am not quite as downbeat on the investment landscape, but I do easily see a scenario where stocks gain little ground over the next few years.

There are a litany of concerns investors should have right now on the economy and the markets. The number one reason I remain cautious is the yield curve, which has become inverted across all data points.

This is the first time since 1981 this has occurred. For those not old enough to remember, that was not a good time for investors.

Every single one of the 10 recessions the country has had since 1957 has been preceded by the inversion of the Treasury yield curve.

The graph, above, does a good job of showing where the economy/curve is on a historical basis. Based on this, some sort of reckoning seems on the horizon.

Investors may need to embrace some new tactics to successfully navigate this environment. Here are three things I am embracing across my investment portfolio.

Cash Is Not Trash

After a decade and a half of getting little to no return on their cash, investors have started to get paid on their savings since the Federal Reserve started hiking interest rates in March of last year. That means cash can produce decent returns for the first time in recent memory.

Three-Month Treasuries yield over 5% and the One-Year Treasury returns nearly as much. These are good places to stuff excess cash in a very uncertain market.

Covered Calls

My regular Real Money readers know that I have been making extensive use of simple covered call strategies for more than a year now. This strategy, which involves buying an equity and simultaneously selling just out of the money call strikes against the new position, should continue to do well if the markets are destined to trade sideways. Some of my recent covered call plays are here and here.

Not only do covered calls provide downside risk mitigation but if stocks do go nowhere over the coming years, they should provide far superior returns compared to owning straight equities.

Covered calls are best used within tax-deferred vehicles to avoid short-term capital gains.

Investments That Throw Off Cash Flow

If equities are not going to provide any consistent, significant returns in the coming years, alternatives must be found that can provide positive cash flow. Personally, I am looking to further diversify my investment portfolio by adding some investment property to my stock holdings. The trick will to be disciplined and find properties with staple tenants that return positive cash flow even with 30-year mortgage rates around 6.5%.

Although I don't see mortgage rates returning to below 3% in my lifetime, I believe the coming recession will push them back down in the 4% to 5%  range over the next few years.

Being able to refinance already cash-producing properties at these lower levels will make these types of investments even more accretive. Having "hard" assets provides nice diversification from equities as well.

At the time of publication, Jensen had no positions in any securities mentioned.