You have read all the headlines about the trillion-dollar troubles that are plaguing Social Security and the issues about long-term solvency. You have probably also seen the headlines about potential pension shortfalls at many corporations and municipalities. This tells you that the moves you make in your regular accounts and IRAs are more important than ever.

What would you invest in? The economy is in tough times not seen in over a generation. Worries about some crisis hitting are persistent and quite reasonable. Unfortunately, our long-term future is not well served by “safer” alternatives such as bank accounts that yield near-zero interest rates. If you want added safety but with some growth and income potential (no matter how modest), where should you turn?

A few years ago I started telling my clients, students and readers that two words should be their guideline when they are looking at long-term investing in the age of crisis….”human need.”
Whether you are buying stocks, exchange traded funds (ETFs) or mutual funds, “human need” should be guiding your decisions. No matter how good or bad the economy is (and yes…it really is bad today), you should consider securities of those companies tied to “human need.”

Basics and Necessities

In other words, think of those products and services that people will keep buying no matter how good or bad the economy is. What would they continue to buy? What would YOU continue to buy? Most certainly you would keep buying food, water, energy and other staples of modern life. No matter how many people are unemployed, they will still have to eat, drink and turn their lights on or drive their cars. Even if driving that car means going to the unemployment office.

However, the issue can be even if you find investments tied to human need, you have to concern yourself with the safety of those individual companies (if you are buying stocks). These days, there can still be companies having a difficult time even if they are involved in selling necessities. You could have a great industry yet still get stuck with the stock of a troubled company.

The best way to avoid the risk of a single company is (as you have heard forever) is to be diversified. But I am not suggesting that you buy many company stocks to strive for diversification. Buying many stocks can be pricey and unwieldy. How much time and research can you bear while you are busy you’re your work and life?

Exchange Traded Funds

It is better to buy securities where diversification is handled in an efficient and cost-effective way for individual investors. This is where the popular Exchange Traded Fund (ETF) comes in. As many of you know, an ETF is much like a hybrid between a stock and a mutual fund.

The ETF is like a mutual fund in that it is diversified among a group of securities (stocks or bonds for example) in a particular industry or sector. It is like a stock in that you can buy shares of it in the same manner as a regular stock. You can do many of the same things with an ETF that you can do with a stock. You can a single share…or 50…or 100 or more. You can buy them through your stock brokerage account instantly with a few mouse clicks (or order with a broker on the telephone) and you can just as easily sell them.

With ETFs you can place stop loss orders or just about any type of market order as you can with a stock. ETFs can be bought with margin (be careful here!) and many of them do have options available on them as well. In addition, you can short sell them as well if you are bearish (again, be very careful here).

There are many investors (and speculators) that use them as a proxy for the entire market. A good example is the ETF issued by State Street that tracks the Standard & Poor’s 500 index (symbol SPY). This index measures the performance of the large capitalization sector of the US stock market. Although it is diversified, I am currently not a big fan since I am bearish on the general stock market.

Human Need Track Record

The interesting thing is how well human need worked since 2007. When you compare the S&P 500 index (through the ETF with the symbol SPY) against even a relatively modest ETF such as Powershares Dynamic Food & Beverage ETF (symbol PBJ), you can see the value of investing in human need.

For the 5 years ending Dec 31, 2011, SPY ended down 10 percent while PBJ ended up 20%. Although SPY has a slightly higher dividend yield (2.45% versus PBJ’s 2.30% as of Dec. 2011), PBJ held up very well during one of the worst 5-year periods for the stock market in a quarter century.

Stocks and ETFs tied to human need don’t guarantee profits or gains in the short term. They have certainly experienced their share of volatility and corrections. However, they do tend to have greater resiliency and overall performance when compared to the general stock market over the longer term during difficult economic times.

As always, do your due diligence when selecting ETFs (or any securities) and discuss the risks and choices (even human need investing) with your Financial Advisor.