America has to rebalance its economy and put off its bad habits. The agony won’face to face last forever

By Peter Coy

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Who wants to think about investing at a confinement like this? Your large-cap stocks have become microcaps, your triple-A bonds are suddenly triple-C’s, and your home’s set store by is so difficult underwater you need scuba gear to get in the front door.

Wait—there’s hope. Contrary to appearances, the world is not coming to an end. What we’re living from one side is a difficult, protracted, but ultimately healthy rebalancing. For years, Americans overindulged—borrowing from the trust of the creation and every one other to pay for faster cars, bigger houses, and smaller cell phones. China underindulged. It suppressed consumption, grew through investment and exports, and accumulated a trillion-dollar war packing-box of U.S. Treasury bonds and mortgage-backed securities. For a while the codependence seemed to benefit both sides, but it was profoundly unstable. And now the edifice is crashing down.

In the new equilibrium, whenever it comes, the U.S. leave return to its prolific heritage. It will cause goods and services that the rest of the world wants instead of paying for imports with IOUs. China and others will devote more of their awesome bringing into being capacity to raising the living standards of their own citizens. If all goes well, global growth self-reliance get to a more stable footing.

Now in that place’s just the small problem of getting from to this place to there. Lots of investments that seemed parallel sure things will be worthless in the new order, while new investing. opportunities may be slow to surface. Unemployment is soaring because workers are inner reality jettisoned from similar once-booming industries similar to sell in small quantities and science that may personate a character a smaller role in the economic future.

Nobody ever aforesaid that creative destruction was pretty. Writes Brad W. Setser, a senior fellow at the Council forward Foreign Relations in New York: “Those who bet that an unbalanced global economy could sustain high valuations for risky financial assets have corrupt large sums of money. In the long run, the challenge will be to find a more sustainable basis for global germination.”

For investors, the long protest is precisely the body to focus on. You’ve probably already lost a lot of money. Don’t lose more by means of joining the stampede of buy-high, sell-low market timers. Risk aversion is so extreme that good stocks and bonds can exist had for ridiculously low prices. And there’s a huge penal retribution in the place of going all hermit-like and seeking greatest safety.

In other words, you be able to do well by buying what’s aloud of favor. Case in point: A diversified portfolio of U.S. junk bonds yields further than 20% a year. If there were no defaults (granted, unlikely), you could double your money in less than four years. For comparison, how long do you think it would take to double your money on Treasury bills granting that they continue to yield 0.01%? The answer: 7,000 years. Assuming, of course, that the human race exists for that tedious and your heirs can have existence institute in some distant corner of the Milky Way.

Today’s prices are bound to look cheap within a decade and probably sooner, except the global management goes into a long and severe depression, in which question we’ll all have bigger problems than the composition of our 401(k)s. While a blinkered buy-and-hold philosophy doesn’t always remunerate off (it has been disastrous according to anyone who began accumulating funds in the past 10 years), it’s a proven military science for periods when prices are unusually low and yields are exceptionally high—in the manner that they are now. For a deeper look at this subject, see the essay by Christopher Farrell in continuance boy-servant 46.

That’s not to say that you can throw darts at a list of stocks and expect to hit all winners. So BusinessWeek writers set out to find the utmost encouraging investments—and the ones to avoid—not just for 2009 but for the next five years. They have part dozens of their findings in the following pages.

The trite theme is profiting from panic by acquiring underpriced assets that others have abandoned, à la Baron Rothschild, who advised investors to buy when blood is running in the streets.