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NEW YORK (MONEY Magazine) -
This summer rising oil prices raised the specter of '70s-style stagflation. If that ghost isn't scary enough, you can worry about today's overextended U.S. consumer and federal government, and tomorrow's aging boomer. After all, some smart people are frightened.
"We can't afford to pay for all the medical care baby boomers are going to need," says Bill Bernstein, a neurologist turned finance guru. A Medicare crisis, he says, could be "the biggest threat to the republic since the Civil War."
It's human nature to foresee the worst, especially when the present is bumpy. And the economy is rarely perfect. But before you let your fears run amok, remember that the most dire predictions rarely pan out.
Since Thomas Jefferson was president, every 20 years or so the U.S. has faced a financial panic or an economic downturn that looked like a prelude to Armageddon. During the Carter malaise, one think tank after another argued that the energy crisis, inflation, the Cold War and environmental degradation would ruin our future.
Instead we soon made a fortune in the great bull market. In the early 1990s, economists foresaw a "jobless future;" the Goldilocks economy and 4 percent unemployment soon followed.
But prognostications of nirvana don't fare any better than those of doom. Our country was the global economy's golden child during the 1990s, its flexible, tech- and entrepreneur-friendly approach looking like a magic formula for growth. But today the U.S. could be facing a long, sometimes painful return to average. Even optimistic economists figure the boomers' retirement will slow the pace of economic growth a bit.
And we may well suffer a downturn when debt loads finally curtail our spending. But a long period of subpar GDP growth or a recession, even a nasty one, isn't the end of the world, and you've got time to prepare.
What to do
Outsource your investments. Unless the planet comes under Martian attack, there will always be an economy that's thriving somewhere, even if ours is in a funk. Increase your concentration in overseas investments, which should make up 20 percent and, depending on how much volatility you can handle, perhaps up to 50 percent of your stock holdings.
Start with a low-fee, total international stock index fund from the likes of Fidelity, T. Rowe Price or Vanguard. That way you're hedged against not only a U.S. recession but a fall in the value of the dollar as well, since stocks denominated in foreign currencies rise in value when the dollar drops.
Buy TIPS. These Treasury bonds that go up in value when inflation rises are a near-perfect hedge against the ravages of rising prices.
Put a sliver of your holdings -- 5 percent tops -- in gold. The yellow stuff tends to soar when the economy goes to hell. Use low-cost exchange-traded funds (ETFs) to buy in. Then hope your investment goes nowhere.
Fear No. 4: Your job is outsourced
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Worried about the economy? Check these economic indicators for reassurance.
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