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Stocks & Bonds

His Risky Picks are Doing Just Fine

Surprise! A package of aggressive funds could hold up in a recession.

Rick Albrecht is a man on the go. One week, he's escorting a group of disabled veterans on an ice-fishing trip in Minnesota. The next, he's scuba diving off Jamaica. Plus, Rick often joins Red Cross disaster rescue teams as a volunteer. Single, 51 and a renter, the retired Army officer can do what he pleases, at his own pace.

His investments are similarly unpredictable. Rick owns interests in three midwestern ethanol plants through private partnerships. He invests in sector funds and in developing-markets funds, including funds that specialize, separately, in Latin America, the Middle East and Asia. More than half of his assets are overseas. "The U.S. economy is overextended," says Rick, who lives in Sioux Falls, S.D.

Rick has no intention of changing his style -- and why should he? Helped by strong gains in emerging markets, he has passed his goal of accumulating $1 million; his investments are now worth about $1.4 million, more than 90% in stock funds and ethanol.

With his military pension and lifetime medical care as safety nets, Rick would be set for life even if he banked all his money. But he's angling for more profits to fend off hard times. Rick, who grew up in North Dakota, enlisted at 17 because his family couldn't afford to send him to college. He qualified for West Point while in the Army and later served in Europe as an intelligence officer.

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Rick is concerned, though, about what will happen to his aggressive portfolio if the economic slump deepens. Rick can wait for the answer because he expects to hold all of his investments for at least three to five years and because he can use losses to offset taxable gains.

As unusual as Rick's situation is, it raises questions for nearly everyone. Is his mix of sector and emerging-markets funds that much riskier than a fund that tracks Standard & Poor's 500-stock index? And with the economy looking dicey, should you just chuck all of your investments and put the proceeds in cash?

Your instinct might be to cash out because lately stocks have been crashing -- or at least seem to be crashing -- at least one day a week. You may also think it's time to unload anything related to grain, metals or oil because economic weakness here could spread overseas and cut demand for commodities.

The Chindia factor

But in 1973-74, when the U.S. economy shrank more than 2% and U.S. stocks lost 48%, food and grain prices soared anyway. So did oil prices. And that was before the likes of China and India became voracious consumers of the earth's raw materials. Growing wealth in emerging markets means demand for "stuff" will be firm for years to come.

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Since U.S. indexes topped out last October 9, ostensibly high-wire investments have held up surprisingly well. Brazilian stocks have advanced 4%, for example, and T. Rowe Price's Africa and Middle East fund has rocketed 23%. By contrast, the S&P 500 has sunk 16% and the Nasdaq 100 has dropped 14%. This suggests that holding money funds and the like, which pay less than the rate of inflation, isn't the ideal way to reduce risk, at least not in 2008. It would be better, as part of a diversified approach, to own funds or stocks linked to commodities and energy and the nations that provide them.

Rick, hang tight with what you have. You should do just fine.

Stumped by your investments? Write to us at portfoliodoc@ kiplinger.com.