Investing: Going Up?

A FIRM DOLLAR Many believe the buck, which slumped 17% against the euro last year, will continue to weaken as the U.S. government keeps spending money it doesn't have. Yet rising interest rates attract foreign investment and often buoy the dollar, which firmed noticeably after Greenspan's rate signal in late January. The buck may hold firm if, as seems logical, Europe cuts interest rates to combat slow growth. A steady dollar would remove the currency edge of foreign securities, which in dollar terms rose nearly twice as much as they did in local currencies last year. You should favor U.S. assets. As a hedge, hold some European stock or bond funds, which as rates decline overseas could rally sharply. Consider Mutual European or Fidelity Europe Capital Appreciation, which have been top performers over the past three and five years. Credit Suisse Global Fixed Income has been a stellar bond fund over the past five years.

THE RETURN OF RISK AVERSION After Greenspan's rate signal, speculative investments like emerging markets and small stocks stumbled. "This may be the inflection point, where investors decide that risk is no longer a one-way bet," says Tom Gallagher, an analyst for ISI Group. Last year stocks of companies that lost money rose 132%, while those of companies that posted a profit rose just 43%. Rising rates have a way of dampening speculation and should bring safety (and sanity) back into focus. So stick with blue chips that pay a dividend. The Dodge & Cox Stock Fund is a long-run winner. And let the Fed worry about politics. Or not.