One thing has become clear during the sovereign-debt crisis: Governments everywhere are going to be cutting their spending savagely over the next five years.

They may do it under the direction of the International Monetary Fund, like Greece. Or voluntarily, like the UK and Germany. Or slowly and reluctantly, like the US. One way or another, it has to happen. You can't run deficits of 10 percent of gross domestic product or more forever.

So how should you steer your portfolio through the age of austerity? Here are four principles to keep in mind:

One: Keep away from government contractors. In the last decade, the state has outsourced a lot of its work. There have been big contracts awarded - and, as we know, governments are very bad at getting value for money, so most of those contracts came with fat profit margins. Likewise, defense companies will do it tough - wars are a real luxury when you need to cut public spending by a quarter. You don't want to be holding shares in companies such as defense manufacturer BAE Systems Plc in that kind of environment. All of them are going to suffer. Clear them out of your portfolio - then short them.

Two: Focus on regions. Government spending is always concentrated in particular areas, either because they are poor, or because it is where the governing party's voters happen to live. In the UK, that is Scotland, Wales and the north of England, the heartland of the Labour Party, which held power for the last 13 years. But every country has a region of high public spending. Avoid them, because they will be hit hardest. But other places such as prosperous London and the south-east of the country will do fine. Invest in businesses that focus on those places and you won't regret it.

Three: Look for better mousetraps. Governments won't just be able to cut their way out of trouble. The deficits are just too big for that. They will have to innovate as well, finding new ways of doing the same things more cheaply. The private sector is much better at that than the public sector. So look for companies in health care, education or outsourcing that can come up with new, more-efficient ways of doing things. They will have plenty of demand for their services.

Four: Don't forget about growth. The historical record shows that times of austerity are also ones of great entrepreneurial energy. During the 1930s, new industries such as consumer electronics and plastics were created. In the turbulent mid-1970s, the personal-computer industry was born, as companies such as Microsoft Corp. and Apple Inc. were founded. When times are hard, a lot of smart people don't have any choice but to set up their own business. And they will have to do it on the cheap as well, which is usually the best way.

Matthew Lynn is a Bloomberg News columnist and the author of "Bust", a forthcoming book on the Greek debt crisis. The opinions expressed are his own.