ATHENS, Greece–It’s been a good year.

Although I won’t publish the SRI Portfolio returns until next week, the fact of the matter is that the majority of investors who failed to realize good returns this year were the perma-bear types who spent another year “on guard.”

I’ve written before that the SRI investment strategy takes into consideration all the potential problems that exist in the world economy (global imbalances, etc.) as well as the markets (high level of risk-seeking among investors, etc.).

But investment requires action. You can’t afford to stay on the sidelines until every cloud has cleared the sky for the simple reason that by then–usually–investment opportunities are gone.

Though global markets had a great 2006–particularly in the last six months–the future looks a little murkier now than it did 12 months ago. For this reason alone, you should be careful to balance optimistic and pessimistic views heading into 2007: Don’t be overly bullish or bearish.

I’m cautiously bullish as I prepare to set the SRI Portfolios for next year. I expect stocks to outperform once again, but you’ll have to carefully navigate, as you did in 2006, the dangerous waters of the investment world. (See SRI, 13 December 2006, Pushing The Envelope.)

My overarching assessment for 2007 is that the global economy will slow–perhaps substantially–at some point as a natural outgrowth of the downturn that started in mid-2006. It won’t result in a deep recession, though, and global economic growth will resume.

I pay special attention to the bearish economic case for 2007 because it has merit and I agree with quite a few of its main arguments, particularly the point that a US housing slowdown is a potential contagion for that economy and, consequently, the global economy.

The bottom line, though, is that investors will be able to enjoy good returns in 2007. The key is being correctly positioned and understanding that “good performance” isn’t defined by a straight line higher. Be prepared for volatility.

I once again expect Asia and other select emerging markets to outperform developed economies. Of the latter, I prefer Europe and Japan.

I recently noted and would like to reiterate (to provide direction for fresh-money buys) that South Korea, Taiwan and Japan are the laggards for 2006. Investors who like the “beaten down, not beaten up” approach could play this angle. The SRI Portfolio offers investment recommendations in all these markets.

On the other hand, India (see SRI, 25 October 2006, A Genuine Growth Story), Singapore (see SRI, 4 October 2006, Portfolio Shuffle and SRI, 11 October 2006, Testing…Testing), and Russia (see SRI, 28 June 2006, Speaking Of Bears and SRI, 19 July 2006, My Friend, The President Of The United States, George W. Bush) have done quite well and should be bought on the basis of the longer-term story.

And I recently recommended buying Malaysia (see SRI, 6 December 2006, The Money Month):

I haven’t recommended Malaysia this year because its economy (though one of the most open in Asia) needs to do more if it’s to move forward. Progressive ideas aren’t popular, and changes haven’t happened fast enough. The stock market has been losing ground–trading values are now a third those of Singapore and half of Thailand. Malaysia was the second-largest in market capitalization terms in Asia in 1996, but it’s slipped to sixth place today.

Although Malaysia hasn’t figured in SRI’s main Long-Term Portfolio, there’s no reason why it shouldn’t be included in the Alternative Holdings Portfolio.

It’s difficult to trade Malaysian stocks in the US, but the iShares MSCI Malaysia Index Fund (NYSE: EWM) is a sufficient vehicle; this particular basket of stocks constitutes overweight companies I favor in the market, including Malayan Banking (Malaysia: MAY), Bumiputra-Commerce (Malaysia: CAHB) and IOI Corp (Malaysia: IOI). Investors based outside the US can buy those companies individually. Buy Malaysia.

Portfolio Moves

Long-term readers have noticed that I’ve been selling some winners as well as some losers from the Portfolios. I’ve made these moves in the process of charting a course for 2007.

This week, I advise long-term readers to take profits from Vimpel Communications without selling the stock outright. Take any gains you have and leave the initial capital invested. The stock is up almost 80 percent since I recommended it in June. It’s simply a matter of prudence to take something off the table; no one ever lost by booking profits.

Vimpel will remain in the Alternative Holdings Portfolio. The SRI Portfolio is a long-term diversified portfolio, and the secular bull story in Russia remains intact. Allocate the proceeds to other Portfolio picks, or hold on for investments in new SRI recommendations.

Investment Approach

Due to the fact that SRI has seen an influx of new readers, I’d like to offer an explanation of the way I view the investment process.

The first step when you become an SRI reader–with its emphasis on global markets, emerging markets in particular–is to understand the argument that Asia will be a very important economic region in coming years. The next step is to contemplate that evolution and then act in a long-term fashion. Many investors have tried the “smart” way of trading Asian markets or have searched for the latest “hot” story to make a quick profit. These people ignore the big picture, and their profits are relatively small.

Long-term readers know that I haven’t positioned the SRI Portfolio in that manner and that I didn’t work like that when I was responsible for stock selection and sector allocation for another financial advisory. In other words, generating long-term, positive returns while avoiding short-term downside is the theory upon which I’m constructing the SRI Portfolio.

And I make every effort to alert investors when I see moves to the upside or the downside or any other special situations.

The approach here is top-down. I first identify long-term investment themes (or, as my colleagues and I call them, global secular trends). Because of the long-term approach, the Portfolio must be able to endure short-term volatility as long as we continue to be on the correct side of the global secular trend. To achieve this, the Portfolio is being constructed to offer a diversified set of holdings, while I also offer hedging ideas for more-complete advice.

A characteristic common to the Portfolio companies is suitability for the new realities of a changing world. They’ll benefit the most from the changes taking place in the global economy.

No one knows how long it will take for the global economy to navigate the secular trend identified here. This is the reason investors need to remain focused and have a portfolio that can last and perform well on a tactical basis. After all, the way to stay in the game isn’t by losing all the money, and tactical mistakes can cause that. This is the main reason I won’t put convictions above analysis and will avoid suggesting only one type of attitude or trade, especially short-only strategies.

It’s important that you look at the SRI Portfolio as a whole and not as an assortment of stock tips. Although few people will buy the Portfolio in its entirety, you, at the very least, need to buy SRI’s investment theme in order to diversify. Buying only banks or tech companies because you like the stories may offer a reward, but such an approach won’t provide the lasting benefits of the overall Portfolio.

Keep in mind that SRI comes to you weekly and always offers current advice. Adding and subtracting stocks from the Portfolio can be done more easily this way. There’s always another week, and neither readers nor the editor need to rush. Patience has always been a good thing to have when investing.