The state of the U.S. economy continues to worry many investors. Some are wondering if they should dump their U.S. stocks for fear that the U.S. stock market will move further down due to rising debt and unproductive government policies.

We think this would be a mistake. In fact, our investment advice is that you should keep at least one fifth of your portfolio in U.S. stocks. Here’s why.

The troubles that have stirred markets recently – like the downgrade in the U.S. debt rating – are much different from great house-price collapse in the U.S. in 2007-2009. Today there is no boom that could deflate and bring down the economy.

And while the economic recovery has slowed, businesses are piling up record-breaking hoards of cash.

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Investment advice: Gridlock in Congress can be a good thing

During the tense debate on raising America’s debt ceiling this summer, it became clear that the Democrats are obliged to tone down their policies to get the Republicans to agree to any new legislation. Republican opposition could well lead to a state of gridlock in the U.S. However, our investment advice on this situation may surprise you. A state of gridlock can be a good thing, if it reduces uncertainty. And U.S. presidents tend to get a lot more market-friendly in the second half of their four-year term.

That’s especially so after they’ve lost control of one house of Congress and lost a lot of members in the other. In the November 2010 mid-term elections, of course, the Obama administration lost control of the House of Representatives and also lost much of its majority in the Senate.

Following those elections, the stock market went up, as if to prove our point about gridlock.

Investment advice: Now is a bad time to dump U.S. stocks

Aside from the U.S. economy’s long-term powers of recovery, we see exposure to both the U.S. dollar and U.S. stocks as valuable forms of geographic diversification for Canadian investors.

It’s also true that if the United States tackles its debt and deficit by cutting tax rates and eliminating tax gimmicks and incentives, the market and economy could turn around quickly.

That’s why we continue to recommend that you hold 20% to 30% of your portfolio in high-quality U.S. stocks.

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