Sometimes Doing Nothing Is Best

10/02/2008 10:00 am EST


Tim Middleton, contributor to MSN Money, says sitting tight and waiting for opportunities may be the way to play this panic.

As financial carnage worldwide grows to biblical proportions—as in Armageddon—shell-shocked investors have three choices.

One is to sell out and run away—and stock exchanges have experienced heavy volume as many have opted for this choice. The second is to hunker down and do nothing, since what you own is already worth only a fraction of its intrinsic value. The third is to heed Baron Rothschild's advice and begin snapping up the bargains chaos is creating.

I recommend the middle way.

Even choosing to remain on the sidelines involves risk: a big money-market fund has "broken the buck," chilling our faith in almost any refuge other than the mattress.

But surviving chaos doesn't require genius; patience will do. The most important financial decision you can make today is to ignore what's stampeding so many others. This, too, shall pass, and as it does you will find opportunity right behind it.

This is not a garden-variety bear market we are experiencing—the type that, on average, Standard & Poor's says produces a 27% total decline in its 500-stock index. Nearly a year into this one, nobody really knows the extent of the economic sickness that it represents. So, this could be one of those bears that could reach or even breach the all-time records for losses of 40%.

If indeed this bear stands to go down another 10% or more, running for the exits is a bad idea. Not only do you lock in paper losses, you are apt to miss out on the eventual recovery, which could be explosive.

That is the view you should take in any investment account, but especially your 401(k). Even when global economic officials behaved stupidly in the Great Depression of the 1930s, investors were ultimately made whole.

As for buying: the time will certainly come, but it can't hurt to wait for markets to become less confused.

Deciding what to buy is easy: just hew to your overall portfolio plan, trimming down positions that have gotten too large—like bonds and cash—and bulking up on those that have shrunken the most, like foreign stocks.

Among regions, foreign developed markets will be unattractive if the dollar continues to rally—meaning our own market is correspondingly more alluring—but emerging markets should continue to experience substantially higher growth rates than anyone else.

And commodities, though they have taken a walloping, are likely to prosper once earnings comparisons are being made against normal rather than peak periods.

But as the chaos ebbs, you will discover stocks you wanted to own when they were $1 are now 75 cents. Consider the possibility that the market, and not something fundamental, is responsible for the mispricing. The good is being thrown out as well as the bad. That creates bloody bargains.

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