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And so far global authorities have behaved sensibly, even brilliantly. Central banks have coordinated massive floods of liquidity to prevent credit from seizing up altogether. Paulson and Federal Reserve Chairman Ben Bernanke have shrewdly protected firms too big to fail, like AIG, while allowing others like Lehman to collapse.
That is, they've chosen prudently -- at least so far -- to reintroduce "moral hazard" into a financial system that under Bernanke's predecessor, Alan Greenspan, had run amok because excess was encouraged rather than punished.
Cheaper now, but risky, too
As for buying: The time will certainly come, but it can't hurt to wait for markets to become less confused."Wal-Mart gets $3 billion in market value lopped off the day Lehman collapses!" Bowers marvels. "The market is doing things that make no sense. As time goes on, the bad news will be more specific to stocks where there are actual earnings impacts. We're getting to the point where most of the money is transferred from weak hands to strong hands -- to battle-hardened investors. Those folks have a long-term view and see this as an opportunity rather than a hit to their living standards."
What's more, Bowers believes, this clarification has been sped up by Paulson and Bernanke. "Now that they've introduced a strike against moral hazard by letting Lehman fail, whatever was going to unfold over the next year will happen within the next few months," he says.
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Evensky says he and his staff are already planning actions they'll take in more-orderly markets. "We'll be selling bonds and buying stocks," he says, noting the former have rallied as the latter have tanked. "Everybody talks about buying low and selling high, but almost nobody actually does it."
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.
If that approach isn't aggressive enough for you, overlay it by fine-tuning your original plan in light of events. Among sectors, health care has the kind of defensive attributes that will allow it to outperform if, as some economists are now speculating, the domestic market goes sidewise during a prolonged but not necessarily deep recession. Ditto consumer staples, which you buy whether times are lean or fat.
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Who'll bail out the Fed?The Fed started the year with $800 billion in cash. That's now down to less than $200 billion. What happens when the money runs out? asks MSN Money's Jim Jubak.
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. Like many advisers (including me), Bowers is recommending his subscribers remain overweight on energy and light on financials.
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.
At the time of publication, Timothy Middleton didn't own any securities mentioned in this article.
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