From the action I’m seeing in the market, I would say that investment pessimism is now officially feeding on itself because you can’t really call what’s happening in the stock market a reaction to reality—but more a reaction to negativity and fear.

So, what’s the right strategy here?

In one sense, there isn’t a “strategy,” per se, that one follows, unless you want to try your hand at market-timing, which is a fool’s errand if you are doing it with anything but your mad money. Here’s why:

Reason #1

There’s no telling where the bottom of a recession, or a stock market for that matter, will be. And it’s a fool’s game to try to guess by market-timing. To successfully market-time, you need to know both when to get out and when to get back in. Are you willing to do that?

Reason #2

The average recession lasts 11 months and generally occurs when stocks and/or interest rates are much higher than they have been in this cycle. The stock market is actually reasonably priced, unlike during the past bubble in technology, when p-e’s were sky-high. (See also: “Your Recession Survival Guide.”)

Reason #3

Running to oil and gas and maybe gold is not necessarily a solution or a quick fix for your portfolio. A faltering economy or consumer could mean less demand for these commodities, and yes, prices are reacting that way. Oil, which traded above $145 in early July, recently fell to less than half that price. Yes, gold was hitting records, crossing the $1,000 threshold in March, but again, if consumers are going to keep their wallets in their pockets, demand for the precious metal could decline as well. Right now, it’s down around 20% from its high.

Reason #4

What about cash?

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Cash looks great when everything else is falling, but it won’t look so great the minute the markets turn around and you’re stuck still earning a tiny yield which, by the way, is going down as the Fed cuts rates.

Reason #5

REITs? Sure, we saw some great returns from 2000 through January 2007, and then pfft! In just over a year and half, they’ve lost around 50% of the gains earned in the prior 7 years!

Reason #6

Bonds? There’s a short-term benefit, maybe, but with the 10-year yielding less than 4%, what’s the return after taxes and inflation? Again, it’s a return, and that looks great when other options are in the red, but when the stock market turns up—and it will turn up, whether tomorrow or next month or in 2009—a couple of decent days in, oh, the 2% range, will more than make up for a year’s interest on a 10-year Treasury. And that’s before taxes take a huge chunk of your Treasury interest away.

Reason #7

Stocks are now officially on sale. Yes, we’re in a bear market—in fact, we’re in multiple bear markets, from stocks to REITs to commodities—but the bargains are out there.

Why does it seem that stocks are the one thing that buyers shy away from when they go on sale, but will gladly pay full retail for when the sale signs come down? Ever heard the expression “buy low and sell high?” This is “buy low” time.

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