With all the negative news that’s right now permeating the global financial markets – hammering stock prices – we wouldn’t blame you one bit if you wanted to stick your head in the sand.

But before you cash out and take that escape route, there’s a stock market chart we’d like to share with you.

The point this stock market chart makes is very simple – and also very powerful. There will be wars, financial panics, recessions and depressions, political scandals and skullduggery, and even global financial crises. But the bottom line is that – over the long run – stock prices tend to head higher, meaning it pays to remain invested.

There are two key reasons why this is so:

1. People are remarkably resilient, which means that our stock and financial markets are, too.
2. Nearly every crisis that’s sent stock prices lower has ultimately proven itself to be a remarkable long-term buying opportunity.

Dealing With a Dour Outlook

Admittedly, with the stock market staggering, both those points are somewhat tough to embrace at the moment. We understand how you feel; we’re also struggling to come to terms with the same naysayers and doom doctors you hear on the news every day.

And it doesn’t become any easier when you look at short-term stock-market charts and see that the markets have officially dropped into "bear market" territory, with the broadly diversified Standard & Poor’s 500 Index having taken a 22.55% header since its record high last October. The U.S. economy is in the tank and the evidence is mounting that it’s going to stay there for awhile: After all, gross domestic product (GDP) is tepid, unemployment is rising, bank failures are continuing and the global credit crisis we’ve been dealing with is threatening to burn out consumers the way a California wildfire burns out homes.

No doubt about it: Right now, the overall outlook is bleak.

But, again, as the chart shows, these challenges are not insurmountable.

Especially, as I told a standing room only crowd of more than 1,000 investors at the "Agora Wealth Symposium" in Vancouver, B.C., recently, when you take two specific steps to put the odds as much as possible in your favor. Those two steps – which we talk about all the time here at Money Morning - are the correct portfolio structure and protective stops.

The Dynamic Duo: Portfolio Structure and Protective Stops

Let’s look at the portfolio structure first.

As longtime readers know, we’ve recommended our proprietary 50-40-10 portfolio structure for years (50% "base builder" investments, 40% "global growth and income" plays and 10% the speculative "rocket riders). Not only is this mix time-tested (and, under the present circumstances, battle-proven), it ensures that we always have the right mix of conservative holdings and aggressive profit plays – no matter what the overall market happens to be throwing our way.

Here’s a brief recap if you’ve just joined us:

• Our "Base-Builder" investments are the so-called "safety and balance" portion of a portfolio, and should account for as much as half its value. Conservative recommendations like these will help protect our money from severe declines – such as the "perfect financial storm" that’s upon us right now.
• The "Global Growth & Income" portion of the portfolio, with its emphasis on dividends and internationally focused holdings, will serve as a thick layer of financial armor and a stream of cold hard cash to tide us through what looks to be a range-bound market for the foreseeable future. This should account for up to 40% of the portfolio’s holdings.
• And, finally, our "Rocket Rider" plays will give us the spectacular upside potential that can beat the markets during good times – even though they constitute only 10% of our holdings.

Now let’s talk about protective stops.

No matter how you "feel" about the prospects of a particular company or even about the outlook for the stock market in general, we advocate the use of protective stops because they help us maximize profits even as they prevent small losses from ballooning into catastrophic ones. And that’s not just in bear markets, either. As the old Wall Street adage tells us: "You can never go broke taking profits." That means that protective stops work in bullish situations, as well as in bearish markets like the one we’re trying to navigate now.

Time and again we’ve heard investors tell us that protective stops cause them to second-guess themselves when they end up selling a company that appears to be trading cheaply or has good prospects. Those same investors tell us how they don’t "feel good" about cutting loose a company that’s a household name, or that is widely believed to be "too big to fail" (itself a badly flawed concept).

But in down markets that could go far lower, cutting loose your losers is precisely what you want to do.

Pan American World Airways, Eastern Airlines, Citigroup Inc. (C), The Bear Stearns Cos., MCI WorldCom, Montgomery Ward, Eastman Kodak Co. (EK) and Enron Corp. were all household names once upon a time, too.

Now they’re four-letter words.

And that’s why, in closing, we want you to begin each day by remembering the stock market chart we’ve shared with you today.

Tape it to your refrigerator, banker’s lamp, or computer monitor if you have to.

No matter how bad things could get in the months ahead, history (and this stock market chart) show the markets eventually will turn around.

Just when doesn’t really matter.

What does matter is how well you handle your portfolio and investments in the meantime. For that’s what will determine whether you’re among the losers or the winners when that stock market turnabout comes.

News and Related Story Links:

• Wikipedia:
  Gross Domestic Product.

• Investopedia:
  Bear Market.

• Google Finance:
  Standard & Poor’s 500 Index.

• Money Morning News Analysis:
  Federal Reserve Holds Rates Steady at 2.00%, Says "Downside Risks" and Inflation Remain Concerns.

• Limiting Losses (Demonstrative Charts).
• Investopedia:
  Protective Stops.

• The London Free Press:
  Basic stock trading rules help avoid common mistakes.

• SmacVault Weblog:
  You’re Never Too Big to Fail.

• Wikipedia:
  Pan American World Airways.

• Wikipedia:
  Enron Corp.

For investors who are used to living large, this has been the year from hell.

The markets are tanking. Food costs 25% more than it did a year ago. Inflation is on the march for the first time in decades. The sky’s the limit on gasoline after oil prices have doubled in the year.

No doubt about it: As far as financial downturns go, this mess is the real deal.

With that in mind, we’ve taken the time to provide you with candid answers to four questions we’ve been asked time and again. And that’s not all. We used those questions to craft a three-step strategy that will give you the returns you seek, without forcing you to "bet the ranch."

Q: How Bad Are Things Right Now?

A: Let’s not mince words, here – they’re bad. Our take is that this is the worst financial crisis since the Great Depression. Folks should not be the least bit surprised by last week’s horrendous drop-off, nor should they be surprised to learn that the Dow Jones Industrial Average has endured its worst June since 1930.

The sad thing is that it didn’t have to be this way.

For nearly 20 years, the U.S. Federal Reserve under former Chairman Alan Greenspan flooded the markets with cheap money and easy credit that encouraged individuals and institutions alike to take hugely imprudent risks with their money. The Fed should have opted to "stand pat" and allowed the greenback to strengthen; instead, it created all that cheap money and allowed the dollar to sink to Third World debtor status.

Unfortunately, it doesn’t look like current Fed Chairman Ben S. Bernanke is going to "get with the program" and see the light anytime soon.

Q: How Bad Could It Get?

A: Our proprietary technical analysis suggests that we could actually see the Standard & Poor’s 500 Index trading at half of its 2007 peak of 1,576.09, which would send the broad index all the way down to a sickening 788.04 before this is all done.

While this is possible, we’re not saying that it’s necessarily probable. That’s actually an entirely different question and could well be determined by one key issue: How quickly and how thoroughly the banks and financial institutions "de-leverage."

If banks "came clean" all at once, the markets would probably take a quick hit. As history shows us – quite clearly – the financial markets can digest bad news remarkably well, and tend to spring back very quickly.

Unfortunately, by intervening so aggressively and so frequently, the central bank has kept the markets from functioning effectively. Indeed, all the Bernanke-led Fed has done is to postpone the inevitable.

Team Bernanke also is sending the wrong message – telling financiers that it’s somehow OK to keep hiding as much bad debt as possible for as long as possible because Uncle Sam will come riding to the rescue.

This is a complete perversion of the Federal Reserve Act, which was created "to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

And, as investment guru Jim Rogers pointed out when I interviewed him at his home in Singapore earlier this year: "Nowhere does [the Act] say that the Fed is supposed to bail out investment banks. It’s absurd."

Unfortunately, no matter how absurd this seems, the bottom line is that it’s really happening – and that means we must face the problem head on and deal with it. To deal with it effectively, however, you have to know precisely what you’re dealing with. So, let’s take a look at some key questions you should be asking.

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Q: How Will It Affect Me?

A: There’s obviously going to be a financial effect. Not only are the markets likely to remain unsettled until the de-leveraging is complete, but the Fed’s reckless liquidity-pumping scheme will result in serious inflationary pressure well beyond what we’re already feeling.

As disheartening as that is to accept, the real challenge we’ll face as investors will come from the person we gaze upon in the mirror each morning.

The reason is that we tend to default to our most basic and counter-productive instincts when the markets get rocky. We allow irrational fears to take hold. Then we let those fears take over. The result: We begin making bad decisions that all too often induce us to join the rest of the investment lemmings and run right off the cliff.

Next time you find yourself in such a predicament, take a moment to step aside, take a deep breath and really evaluate your situation. You have many more options than you might initially believe.

Q: Is There Any Good News?

A: Absolutely. As history teaches us, the lowest returns come to those who buy near, or at, market peaks – like those of 1928, 1969, 1999 and 2007.

Profits are usually a byproduct of courage – or, at the very least, a belief in proven strategies. That’s why the biggest investment returns come to those who invest when the days are darkest: Think 1932, 1942, 1982 and 2003 – when the world looks like it’s going to hell in a hand basket. (Even so, that doesn’t make the conversations we have with our spouses – such as this recent exchange with my wife – any easier: "Honey, you remember that stock we lost $20,000 in? Well, we just bought more …").

I may be the trader in the family, but she knows the statistics, too. Even so, understanding that it pays to "buy when there’s blood in the streets" doesn’t make the move any easier. I’m sure you can relate on this point.

Q: Are there any steps I can take right now to protect my assets, and even profit in today’s markets?

Again, the answer is: Absolutely. Using history as our guide, the real question is not will the markets recover, but what’s necessary for them to do so? And what can I do to protect my upside potential?

To make the process a bit simpler, I’ve detailed three rules to follow:

• "Sure things" beat "next-best things" – virtually every time: Having a properly balanced portfolio is the first, and most important, step to surviving and prospering in uncertain markets. Believe it or not, many investors are still "putting the pedal to the metal," even though this is hardly the time to do so.

We urge a proprietary 50-40-10 portfolio split (50% in "Safety & Balance," 40% in "Global Growth & Income," and 10% in speculative investments that we’ve playfully labeled as the "Rocket Riders" to underscore our point). Quantitatively, this risk-reduction mix helps us avoid the losses of the broad market during bearish periods, and achieve as much as 91% of the stock market’s total returns during rallies – while using less than half the market risk to accomplish all this.

• Profit from inflation: When the markets get tough, inflation can really eat into your returns. To counteract this, a good chunk of assets should be focused squarely on commodities, energy and other stocks that actually can dually benefit from inflation and raise prices for the goods and services they sell as a means of additional protection. For added security and upside, split ‘em using the 50-40-10 structure above.

• Go where the growth is: Within the next five to 10 years, global investments are projected to double to nearly $300 trillion, with 60% of that growth coming from established markets such as the United States and Japan. That means that tomorrow’s market leaders will probably be selling products we’ve not yet seen, featuring names that we can’t pronounce.

Right now the best values can be found in global blue chips, offering the unbeatable combination of high cash flows and strong pricing power. Not only have these shares been beaten down to the cheapest levels we’ve seen in years, but they have plenty of cash on hand.

[Editor's Note: Investment guru Jim Rogers predicted the global financial meltdown, as well as the twin escalations in oil and food prices worldwide. To obtain a free copy of his new best seller, "A Bull in China," in which he details ways for investors to profit from these trends, please click here.]

News and Related Story Notes:

• Money Morning Special Report:
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.

• Money Morning Special Investment Report:
  Global Investing: Has Wall Street Rigged the Game?

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

As rocky as the global markets have been, the worst is yet to come, the Royal Bank of Scotland Group PLC (ADR: RBS) warns.

RBS analysts have warned clients to brace for a full-blown crash in the global stock-and-bond markets over the next three months as the conflicting realities of slowing growth and rising inflation paralyze the world’s major central banks – causing “all the chickens [to] come home to roost,” Great Britain’s Daily Telegraph newspaper reported.

The report, which first surfaced late Wednesday, raced across the Internet yesterday (Thursday), though it appears that European news organizations are giving it much wider play than their U.S. counterparts.

The predicted swoon would cause the U.S. Standard & Poor’s 500 Index – already down 15% from its trading high of 1,576.09 reached Oct. 11 – to nosedive all the way down to 1,050 by September. For the closely watched, broad-based U.S. stock index, that would represent an additional decline of 22% from yesterday’s close of 1,342.83 – and a total decline of 33% from its Oct. 11 apex.

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This is the worst forecast of any investment bank survey followed by Bloomberg News.

“The Europeans, in general, tend to have much-more conservative banking systems and financial vehicles than we have here in the United States,” said Keith Fitz-Gerald, investment director for Money Morning. “They’ve been through centuries of economic and financial conflict. For that reason, they are much more pre-conditioned and predisposed to listen to major warnings like this one.”

The sell-off that RBS expects to deepen started last fall after the U.S. subprime-mortgage crisis turned into a full-blown credit debacle even as it took on a worldwide reach. Banks and brokerages have written off roughly $400 billion in assets. But that torrent of write-downs may get even worse: At a conference in Monaco yesterday, New York hedge fund manager John Paulson estimated that this amount will triple to $1.3 trillion – a reality that will clearly exacerbate the decline of the financial markets worldwide, Bloomberg reported.

The predicted “contagion” will spread across Europe and will afflict the emerging markets, including the fast-growing economies in Asia, the RBS research team wrote to clients in a June 11 report. RBS is Britain’s second-largest bank.

A sell-off of that breadth and magnitude would represent one of the worst bear markets the world has seen over the last century, and would clearly have implications reaching beyond stock-and-bond prices.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, 42, a U.K-based credit strategist for RBS.

In the credit markets, high-grade corporate bonds would see their trading values soar, while their lower-grade counterparts would see their own values plunge, thanks to a “renewed bout of panic on the [global] debt markets,” the Daily Telegraph reported, citing key excerpts of the internal RBS report.

Addressing the fallout that RBS expects to see in the bond markets, Janjuah wrote to clients that he couldn’t “be much blunter. If you have to be in credit, focus on quality, short durations [and] non-cyclical defensive names.”

The credit analyst – who became an industry star after his grim warnings about the current global credit crisis played out as he predicted – also counseled clients that “cash is the key safe haven. This is about not losing your money, and not losing your job.”

RBS expects the U.S. stock market to rally into the early part of July, thanks chiefly to the boosts provided by the aggressive rate-cutting campaign that the U.S. Federal Reserve launched last September and from the tax-rebate checks that were initiated by the Bush Administration’s economic-stimulus plan. Those benefits will soon sputter and the real damage from soaring food-and-energy prices will finally become apparent.

Unfortunately, the world’s leading central banks may not be in the position to help out this time around. In fact, both the Fed and the European Central Bank (ECB) face a so-called “Hobson’s choice” as workers start losing their jobs en masse and lenders continue to cut off credit, the Daily Telegraph said.

Usually, the central banks would just cut interest rates or employ some other form of monetary stimulus to help their economies regain positive momentum. That’s not an option this time around: The soaring food-and-energy prices are already pushing inflationary pressures to levels that will destabilize stock-and-bond markets.

The bottom line is that the U.S. economy could end up with stagflation, the rare but hard-to-eradicate one-two punch of high unemployment and high inflation.

“The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” Janjuah said. “The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.”

And Europe won’t dodge the bullet, RBS debt-markets chief Kit Jukes said.

“Economic weakness is spreading and the latest data on consumer demand and confidence are dire,” Jukes told the newspaper. “The ECB is hell-bent on raising rates. The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB.”

 ”What is being discussed here is absolutely within the realm of possibility and is a possibility that we’ve been discussing here in Money Morning for quite some time, now,” Fitz-Gerald, the Money Morning investment director, said in the interview yesterday. “And we’ve never wavered in that conviction. In situations like this one, the best offense is a good defense, which consists of an appropriately structured and diversified portfolio of holdings that emphasize stability and balance, and current income derived from global markets. That kind of portfolio may well weather this kind of storm much better than a U.S.-based portfolio in isolation.

“This report – and others like it – may be extremely unsettling to individual investors. But the historical record is unequivocally clear that the best profit opportunities come when everyone thinks the skies are darkest. Savvy investors at this point in time can take steps to help them avoid this even if the rest of the world sinks into an economic cataclysm.”

 News and Related Story Notes:

• Bloomberg News:
  
  Stocks, Credit Slump Will Worsen, RBS’s Janjuah Says.

• The Daily Telegraph (U.K.):
  
  RBS Issues Global Stock and Credit Crash Alert.

• BusinessWeek.com:
  Ready for a 300-point Drop in the S&P 500?

• BusinessWeek.com:
  An Even Bigger Bear?

• The Daily Telegraph (U.K.):
  RBS Global Crash alert: Quotes.

• Wikipedia:
  
  Hobson’s Choice
  .
• The Daily Telegraph (U.K.):
  RBS Stock Market Alert: Fund Managers React.