A quick glance at the scoreboard proves my criticism was spot-on…

While the S&P 500 Index slumped 38.5% in 2008, 30 countries witnessed drops of 50% or more. Even more telling, the poster children for the decoupling trade: Brazil (-41.2%), Russia (-72.4%), India (-52.45%) and China (-65.39%) didn’t escape punishment either, despite wild predictions they would…

Clearly, the old adage still applies, “When the United States sneezes, the rest of the world catches a cold.” (Or in some cases, like Russia, they get pneumonia.)

So why resurrect the past? Because decoupling diehards won’t let this junk science die. And sadly, another warning is in order…

Decoupling 2.0 – Redefining The Theory

On the back of an impressive rebound in emerging markets this year, the decoupling chatter is back. Only this time, followers are calling it “Decoupling 2.0.” And they’ve redefined their theory…

As The Economist reveals, “Decoupling 2.0 is a narrower phenomenon, confined to a few of the biggest, and least indebted, emerging economies.” Ones with “strong domestic markets and prudent macroeconomic policies.”

Funny. I read that “redefinition” and think how badly some pundits want decoupling to work out.

It’s still the same farce, however.

• You see, globalization – an undeniable, decades-old, economic force – created one quantum entanglement.
• World markets are inextricably tied together in knots, whether we want them to be or not.
• And if they can ever be untangled, it will take years (likely decades), not a few quarters.

So, as the Decoupling 2.0 banter picks up, let me offer up a dissenting voice – and warn you.

First, don’t be mislead by the headlines…

• Yes, Chinese stocks are up 44.6% in 2009.
• Yes, Brazil rebounded 39.7%.
• Yes, India staged a 51.6% comeback.
• Yes, Russia came roaring back 72.1%.
• And yes, the United States only mustered a pathetic 0.22% gain.
• But nothing’s really changed.

The United States remains the engine of economic growth. How else do you explain the fact that the equity markets continue to move in lockstep?

As you can see in the chart below, some of the BRIC nations started to rebound sooner, but they sold off in February, just like the United States. And they didn’t really gain momentum until after signs that the U.S. economy would fight another day materialized.

Chart Source: Bespoke Investment Group

Decoupling Advocates: Countering The Obvious With Nonsense…

Decoupling adherents will counter this evidence, saying the equity markets might still be coupled, but the underlying economies most certainly are not. Nonsense.

If an economy is doing well that means businesses are doing well. And if businesses are doing well – and most are publicly traded – stock markets will be doing well. You can’t separate the two.

That leads me to the second part of my warning. Whatever you do, don’t abandon your U.S. investments or significantly overweight your portfolios to these “decoupled” international markets.

If you did so the last time, your portfolio got hammered. In fact, if you moved all your investments into China or Russia at the start of 2008, like some investors I know, you’re still worse off than the patriotic fellow that invested in nothing but U.S. stocks.

A hypothetical $100,000 portfolio of U.S. stocks is now worth $61,655, compared to $50,046 had you held all China stocks, and $47,500 had you had nothing but exposure to Russian stocks.

While Decoupling May Be A Farce – Don’t Ignore Emerging Markets

Let me be clear, although decoupling is a farce, that doesn’t mean we should ignore international and emerging markets altogether. That would be foolish. These markets lay claim to stronger domestic growth and more options (higher interest rates and billions in foreign reserves) to stimulate further growth.

What I am recommending, instead, is that you capitalize on these strengths in a more intelligent manner. Instead of going “all-in” so to speak, place a more reasonable wager. Specifically, stick to the tried principles of asset allocation. After all, the theory behind it won a Nobel Prize. Meanwhile, Decoupling 2.0 isn’t even legitimate enough to garner a nomination.

So instead of plowing all your money into international stocks, only allocate a portion. At The Oxford Club we recommend a 30% allocation to international stocks. That’s just the right amount of exposure to profit, without taking unnecessary risk.

In terms of specific investments, I recommend the low-cost, no-hassle, diversified, indexing approach.

• Either the iShares MSCI EAFE Index (AMEX: EFA), which holds positions in 838 companies.
• Or the iShares MSCI Emerging Markets ETF (AMEX: EEM), which holds positions in 340 companies.
• If you want a more concentrated, high profit potential pick, hire a professional. Specifically Mark Mobius and the Templeton Emerging Markets Fund (NYSE: EMF). No one can touch his 40-year track record in emerging markets, even recently. Since the March 9 bottom, his closed-end fund is up 65%.

Good investing,

Louis Basenese

Source: Decoupling Is Still Dead And Here’s The Proof

This from Investment U:

With the stock market’s historic drop this year, some investors have fled to cash. Others are cautiously buying. Most, however, are sitting on their hands.

They shouldn’t be.

Even if you lack the cash – or the willpower – to buy into this market, there is still a very smart move you can make: switch.

Switch from your poor-performing, high-cost, tax-inefficient stock and bond mutual funds to index funds or exchange-traded funds (ETFs).

It’s a very smart move. Here’s why…

Why Choose Exchange Traded Funds Over Mutual Funds?

Compared to exchange traded funds, most mutual funds are a lousy deal, here’s why:

• Each year more than three-quarters of them fail to match the performance of their benchmarks.
• Many are loaded with front-end or back-end loads, 12b-1 fees, high management costs and other expenses.
• Moreover, even when these actively managed funds fall sharply, they still often distribute annual capital gains to shareholders, in effect handing shareholders a paper loss and a tax bill at the same time.

Don’t stand for it. Now is your chance to fight back.

Switching to Exchange Traded Funds Will Save On Taxes

Switch from your underperforming mutual funds to index funds and exchange-traded funds – and save yourself thousands of dollars in taxes in the process.

The IRS allows you to take losses each year to fully offset any realized capital gains. And also allows you to take capital losses to offset up to $3,000 in earned income.

In a year as nasty as this one, of course, you probably don’t have too many realized capital gains to worry about.

You should make this switch anyway. The IRS allows you to carry forward your losses indefinitely to offset future capital gains.

As bleak as the outlook is today, there will be capital gains in your future and, eventually, the tax on them is going to be higher than it is now.

Aside from the thousands you’ll save in taxes (and expenses) in the years ahead by making this switch to exchange traded funds, there is an important psychological reason to do it.

When you get your statements in 2009 and beyond, instead of looking at a smorgasbord of losing positions you’ll be looking at winners. You may not end up buying at the very bottom – few do – but you will have bought a whole lot closer to it than you did originally.

Exchange Traded Funds – Turning Market Lemons Into Lemonade

So take the lemons the market has handed out so abundantly this year and turn them into lemonade with exchange traded funds. Here’s how:

Sell Your Losing	Replace It With:
Gold Stock Funds	Market Vectors Gold Miners ETF (NYSE: GDX)
U.S. Large-Cap Stock Funds	S&P 500 ETF (AMEX: SPY)
U.S. Small-Cap Stock Funds	Vanguard Small Cap ETF (NYSE: VB)
International Stock Funds	iShares MSCI EAFE (NYSE: EFA)
Corporate Bond Funds	Vanguard Total Bond Mkt ETF (NYSE: BND)
Junk Bond Funds	iShares High Yield ETF (NYSE: HYG)
Inflation-Adjusted Bond Funds	iShares Lehman TIPS (NYSE: TIP)
Emerging Market Stock Funds	iShares Emerging Mkts (NYSE: EEM)

Using Identical Exchange Traded Funds As Smart Tax Moves

If you’re already invested in exchange traded funds, incidentally, you can still make the same smart tax move by selling your losers and moving into virtually identical funds.

For example, you can take a loss in one S&P 500 Index Fund (AMEX: SPY) and replace it with, say, this S&P 500 Index Fund (AMEX: IVV). Even though these funds have the same benchmark and are virtually identical, they are different funds, so the IRS allows the switch.

(For a complete list of ETFs at Fidelity.com.)

However, you cannot sell a fund and buy back the exact same one and qualify for this deduction (unless you wait at least 30 days). If you do, you run afoul of the wash-sale rule.

Incidentally, if you own individual shares that are down but for which there is no logical replacement (think Apple or Berkshire Hathaway) and you don’t want to sell and risk that the stock will be substantially higher 30 days from now – always a possibility from these depressed levels – you can double down on your stocks now, then sell your higher-cost shares the last week of December. (You will, of course, be doubling down on your risk for the next 30 days.)

If you plan to do this, however, you need to do it by the end of the month. Once November ends, it will be too late to do it for the year.

Bear in mind, you cannot take tax losses in an IRA, 401(k) or other qualified retirement plan. But you should still consider making the switch to ETFs and index funds for the cost advantages and psychological benefits I’ve described.

Source: Exchange Traded Funds: An Investment Move You Need to Make…