What’s the mood in global markets?

There’s a lot of concern, true. But they need to think over the next 10, 20 and 30 years. [Look at] the years 1965 to 2003. This is a long sweep of history–the Vietnam War, high inflation, low inflation, an oil crisis, a constitutional crisis with President Nixon. The S&P 500 was down 10 out of 38 years. The worst 10-year return was 1.7 percent. But over that period, you compounded at 10 percent per year, doubling your money every seven years.

That’s very good, but only part of the equation. After taxes and inflation, 10 percent goes to 3.9 percent in real terms. Now look at Treasury bonds. After taxes and after inflation, you’ve lost about 1 percent a year. The value of your money is eroding. That is the investment dilemma. And that’s the kind of thing that doesn’t get enough attention because we live in the moment, but we need the money over 30 years.

So do you rethink holding stocks, long term?

No, the reverse. What do you think, there is a free ride, a huge return without a lot of risk after taxes and after inflation? The investment dilemma is that very low risk erodes capital on a real basis over a long period of time. And higher risk creates capital over a long time. That doesn’t mean all stocks. There may be an in between, but certainly if it’s all low risk your chances of retiring in any serious way, if you’re a normal NEWSWEEK reader, is zero.

So you have faith the market will continue to climb steadily upward?

Who knows? Nothing is assured. But stock is rationally the best option for a simple reason. Over the last 200 years, even factoring the Depression in there, the economy grows relatively consistently at 3 percent over time. That creates wealth. The stock market is just a mirror of wealth.

Should individuals be in global markets?

One of the ways to get diversification is to own U.S. and foreign stocks. But most big companies today have some global diversification. General Electric sells its stuff all over the world. There are reasons why people should have more investments in their own country. They shouldn’t be switched too much unless you’re in a very small country.

Having liabilities denominated in some other currency is risky in itself. Currencies can erode. You can do well in those stocks, but give it all back in translation. There have been periods of expropriation, of government instability. Large numbers of American investment houses in the early ’30s were singing a very strong song of investment in Germany. Lots of people got expropriated in the Russian Revolution. This can happen.

So globalized portfolios can be oversold?

It’s not too wise to get carried away by new paradigms all the time.

Do you see one emerging now?

No. There is always a continuum between euphoria and fear, and a conflict of visions. This is from [Charles Mackay’s] “Extraordinary Popular Delusions and the Madness of Crowds,” which is about the tulip mania of 1840. John Templeton, the great investor, republished it as a public service. He says in the introduction [reading], “You should resist the temptation to invest in any assets which would have produced the best performance for the past five years. Instead, search worldwide for… assets which would have produced the worst performance for the past five years, and then select… those whose depressed prices were caused not by permanent but by temporary influences.”

Where does that approach lead you now?

What you should be concerned about is interest rates. Lots of people who own very long-term bonds because they’re reaching for higher yields, are probably taking on interest-rate risks that they don’t understand. To get to higher yields, you have to buy longer-enrollment maturity bonds. But if interest rates rise, the longer and longer maturity bonds have the most risk. Right now there is a mood afoot almost that we sort of have this permanent period of low interest rates.

Where are the opportunities?

There aren’t that many anymore because we’ve had a recovery. But the international markets in our view are still more attractive than U.S. markets. And the emerging markets have their place, and are even a little more attractive than the foreign markets.