We didn’t get the 500-point drop in the Dow Jones Industrial Average that we appeared headed for yesterday, but that doesn’t mean we’re out of the woods.

The U.S. Federal Reserve is of the opinion that an emergency-rate cut of three quarters of a percentage point will help slow or even stop the gut-wrenching drop we’ve seen in recent days.

Many professional investors – myself included – aren’t so sure that’s true. That uncertainty among the pros is why the markets remained volatile for the rest of the day yesterday. It’s also why we think the rebound from the early morning lows smacks of a "dead-cat bounce" – the kind of temporary rally that can sucker investors back into the fray before it picks them clean when the downward trend resumes.

Given that it was cheap money that started this whole speculative frenzy that we’re now paying the price for, we happen to think that the Fed is making a mistake by creating even cheaper capital here. It’s tantamount to providing crack for a crack addict: Sooner or later we’re going to have to pay for this, but that’s a story for another time.

More immediately, the markets have suffered back-to-back triple-digit drops in recent weeks, and stocks have been falling for months. Barring some surprisingly solid earnings reports and some highly upbeat economic data, share prices could continue to fall – if for no other reason than it can take months for an interest-rate cut to work its way through the economic system.

I know that sounds bad. But it’s actually a good thing, and is why we urge readers with strong stomachs to take advantage of the market’s misbehavior and add to critical positions right now.

Four Rules to Live By

Here are four rules to help guide your investing decisions during these topsy-turvy times.

First, zig when other investors zag. Studies demonstrate time and again that investors who buy when the markets are well off their highs – just as they are now – tend to achieve dramatically higher results over time.

Let’s face it: We were overdue for this correction. Since 2003, stocks have performed well, but many of the most-promising companies had become greatly overvalued, making them more of a downside risk than an investment opportunity.

Second, queue up on quality. With the steep global sell off we’ve seen, many markets are showing only slivers of strength. Some observers have labeled this as a "flight to quality." We’re calling it the "buying opportunity of the decade." Think of it this way: There’s a lot of money out there and it’s going to chase the relatively small number of quality stocks. That should provide one heck of a liftoff for the stocks of companies with accelerating sales growth and expanding earnings.

Third, grab the "Global Titans." Many of the companies I just described are either located in, or focused on, overseas markets that remain poised for growth – even if the U.S. market slows down. We call those companies "Global Titans," because they usually derive a hefty portion of their sales and profits from outside U.S. borders.

The old adage [and worry] that "when the U.S. economy sneezes, the rest of the world catches a cold" is becoming increasingly less valid, due to an economic process known as "decoupling." This means that – eventually – such economies as China and others will be able to show respectable growth, even if the U.S. economy slows down or even drops into a recession.

In the immediate term, even the partial decoupling we’ve seen means that these other economies could continue to grow, even if we get mired down by the housing meltdown, subprime crisis and ensuing credit woes. While those markets may take a near-term hit because of the maladies of the U.S. economy, their longer-term growth is much less dependent than ever before on the U.S.-centric model of the global markets.

And fourth, dial up discounts. The throngs of investors who have already rushed for the exits have jettisoned all but the kitchen sink from their portfolios in their haste to "get clear."

We’ve seen this so many times before: Investors throw in the towel at precisely the wrong time. This means that many holdings – especially closed-end funds related to energy and income – are trading at steep discounts to their net asset value.

Putting it in plain English: They’re on sale and continue to produce a healthy income that won’t be affected by the short-term market swings we’re watching right now. And when the markets rebound and head north – as they will – those discounts will narrow, adding to your profits.

Savvy investors can capitalize on this with choices such as the Nuveen Quality Income Municipal Fund Inc. (NQU), which offers potential double-digit returns with relatively low risk. And the hefty 5.1% yield doesn’t hurt, either.

So how else can investors capitalize on what I’ve detailed here?

Here are three moves to make now.

How to Outfox the Bear

 First, make certain a good slice of your money is in investments that offer both safety and balance. We call that category our "Base Builder" investments, and one of our favorites is the Vanguard Wellington (VWELX). Since 1929, it’s captured 80% or more of the market’s upward moves [including many of the years where there were market gains of 20% or better], even with a "safety-first" balanced blend that’s about 60% stocks and 40% bonds. This asset mix maintains your ability to gain in bull markets, while minimizing your risk during more-bearish trading seasons.

Second, include a hefty dose of income in your portfolio but limit it to the Global Titans or dividend-harvest strategies.

PowerShares International Dividend Achievers (PID) or the Alpine Dynamic Dividend (ADVDX) are logical choices to meet both criteria. Not only is the income they kick off reinvested over time, but during low-ball market conditions like we’re experiencing now, the compounding effect will ensure you are dramatically ahead of the game when it gets going to upside again because they can appreciate wildly as the markets recover. Plus, the exposure to international markets helps diminish the risk associated with a Fed that’s hell bent for leather on benign neglect when it comes to our dollar.

And third, throw in a few inverse funds like the Rydex Inverse S&P 500 Strategy Investments Fund (RYURX), which appreciates as the Standard & 500 Index drops. Not only can specialized investments such as this one protect your portfolio from some of the damage inflicted by falling stock markets, they can add to your upside without forcing you to first dismantle your portfolio.

And that’s really what this game is about.

Make these moves now. And when the coffee break conversation at the office turns to the stock market, you’ll be able to display a relaxed grin, while your co-workers are reaching for the Pepto-Bismol.

News and Related Story Links:

• Investopedia:
  The Dead Cat Bounce: A Bear In Bull’s Clothing?

• Money Morning Investment Commentary:
  Four Ways to Profit Even if the Bush Stimulus Plan is a Bust

• Money Morning News:
  World Indices Nosedive; U.S. Markets Could Follow