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TO PROSPERITY

WHERE IS THE ECONOMY GOING? SHOULD I INVEST?

I received two questions from readers expressing concerns about issues that I suspect are on a lot of people's minds right now so I thought I'd share them with you today:

From Betty W.: "Keith, my broker is telling me we ought to have a lot more invested in stocks. But my husband and I are uncomfortable because it seems too risky. What do we do?"

Here's two things to think about:

    * First - Contrary to what Wall Street would have you believe, risk is not about what you ought to be doing. It's about how much pressure you can take - financial or otherwise - before you come unglued.

    * Second - As many people have found out the hard way courtesy of the financial crisis, having an appetite for risk is very different from having the capacity to deal with it. In reality, most investors are far more conservative than they thought.

Here's the thing - thanks largely the introduction of modern portfolio theory and computerized investment modeling, risk has gone from being something investors avoided to something investors gladly took on. And this has permeated every level of investing psychology today with the net result being that millions of people think they ought to have x% in stocks, x% in bonds, x% in real estate etc.

At the same time, Wall Street has been very effective in creating the belief that if you don't pay to play, you risk coming up short. In other words, they've turned the equation around.

This is like telling a five year old that he has to touch the hot stove even though he knows he may get burned. Or, worse, creating the incentive to do so just because the odds of getting burned are small.

This makes no sense.

Therefore, i f you're comfortable with lower numbers and can live within your means, there is absolutely nothing wrong with more conservative allocations than your broker recommends.

Johan W. asks: "Hasn't the Fed saved the day and shouldn't we be piling into US stocks?"

Not in my opinion. The road Team Bernanke is taking is filled with potholes.

A fivefold increase in lending capacity and a doubling of the national balance sheet will not help. Instead of expanding credit, history shows that the Fed should be tightening it.

The thing that most of our leaders have not grasped yet despite their good intentions is that any move to tighten things up will require the Fed to sell billions in bonds - a process that could tank prices and cause yields to skyrocket. (Prices and yields move in opposite directions.) So my guess is that they will do what all politicians do and delay making the decisions that put a real recovery in motion for at least two years or after the horses flee the barn again, whichever happens first.

To be fair, though, Bernanke is not stupid. There is a slim possibility that he may get extremely lucky and that would, no doubt, be great for everybody. But I'm not going to hold my breath. I think the market , particularly as the move to hard currencies or international baskets accelerates, are far more likely to vote with its feet and that the dollar could lose up to 50% of its value in the next 10 years. If that sounds improbable, consider this - the U.S. dollar index has already lost 14.9% since its high in March 2009.

As for piling into U.S. equities, that'd be exceptionally risky for reasons related to Betty's question. Given what we know about world markets and about stocks in particular, you never want to pile into anything - especially now. The risks are simply too high.

Instead, it's better to keep an eye focused on what we know is headed our way - a stronger group of emerging nations that are influencing capital markets like our own in unprecedented ways - and make measured decisions to invest accordingly.

Therefore, to the extent that we do invest in the U.S. (and we do at Money Morning), we want to do so only to the extent those choices have solid cash flows and derive substantial portions of their earnings from global markets that are growing much faster than our own. China, Brazil, and South Korea spring to mind, for example.

In closing, if you're wondering what to do next and how to move forward in the markets, you might find my new book, Fiscal Hangover, helpful. It's due out in a little over a week and it covers how the U.S. role in the world economy is shrinking at unheard-of rates, how government intervention may prevent the U.S. markets from normalizing for years to come, why Asia could become the center of the financial world... and much more.  So far, the reviews have been excellent.

With "Buy" and "Sell" Calls on Brazil ETF, Money Morning's Marquez Catches a 148% Move

Money Morning Staff ReportsAmong the many adages that longtime investors are probably familiar with is one that counsels “you’ll never buy at the very bottom and will never sell at the very top.”But with his recent market calls on the iShares MSCI Brazil Index Exchange-Traded Fund (NYSE: EWZ) in his “Buy, Sell or Hold” column, Money Morning Contributing Editor Horacio Marquez may have done just that.Back on Oct. 27, 2008, Marquez told readers of his popular "Buy, Sell or Hold" column that the iShares MSCI Brazil Index ETF was a "Buy." At the time, the ETF that’s designed to reflect Brazil’s overall stock market was trading at $29.94 a share.But that’s not all: Marquez actually made his market call almost exactly at the market bottom for the Brazil ETF, which had actually closed at $100.47 a share on May 20, 2008. After achieving what would turn out to be the closing high for the year, EWZ started a slow decline that accelerated as the summer turned to fall.By the time Marquez penned his column, the Brazilian ETF had plunged 70%, enabling him to make his “Buy” recommendation at what was essentially the bottom for that ETF.And once he did so, the ETF’s share price began to rally almost immediately. Coincidentally, in the four days following the publication of his column, the ETF zoomed 31%.As it turns out, that was just the start.On Friday, Oct. 23, the ETF closed at $74.34, meaning it had zoomed 148% since Marquez’ original “Buy” column was published. That gain came almost in exactly 12 months.

With "Buy" and "Sell" Calls on Brazil ETF, Money Morning's Marquez Catches a 148% Move

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