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2013: You Don't Need a Weatherman

Pare down stock holdings of companies that have weak balance sheets. Levered balance sheets tend to be weak balance sheets, and a slowdown in business tends to impact levered companies disproportionately. This advice applies to mutual fund and ETF holdings too. Even looking at the balance sheets of the top 10 to 12 holdings alone will give you some indication of how exposed your holding are to a recessionary environment.

Go investment grade or go home. With respect to fixed-income investments -- that is, debt investments that generate a regular stream of income -- weaker companies stand to be hurt in a sluggish economic environment, resulting in possible bankruptcies or missed payments.

What constitutes a weaker company with respect to its debt obligations? A smaller ratio of free cash flow to debt-payment obligations; revenue streams which are unproven, or more importantly, which are highly correlated to other key economic indicators. Within the Standard & Poor's nomenclature, the highest bond rating offered is AAA, meaning "extremely strong capacity to meet financial commitments" -- exactly what I believe investors are going to need in 2013.

Cut expenses. If you think about it, cutting expenses is exactly the same as improving investment performance. It may even be one better because you don't pay any additional taxes when you lower expenses, but you do when you realize gains or collect more interest. From taking larger deductibles on insurance policies, to appealing property tax rates, there are a myriad of ways to reduce your cash burn.

So, I'm not much of a predictions guy. But I like to think I know trouble when I see it and, I'm sad to report, it appears to be just over the next horizon, somewhere out there in 2013.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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