How to Gain from the Economy's Pain

Article excerpt

Byline: Jean Chatzky

Want to make like Warren Buffett and turn the market's risks into your reward? Five investment strategies to embrace now.

Warren Buffett has said that a simple rule dictates his investment strategy: be fearful when others are greedy, and be greedy when others are fearful. Well, he must have cleaned up the past couple of weeks as panicky investors caused the markets to tank and rally and tank and rally again. The VIX, the volatility index--also known as the "fear gauge"--climbed 40 percent in a single trading session.

Enough with all the scrimping and saving, the austerity plans, and the slowly disappearing retirement accounts. Here's how regular people can make like Buffett and win big in these roller-coaster times.

"Everything dropped ridiculously low as a knee-jerk response" when the S&P downgraded U.S. debt in early August, says financial adviser Ric Edelman, author of The Truth About Money. "I think everything is unfairly valued."

He's not alone. Plenty of the best financial advisers, money managers, hedge funders, and economists will tell you there's opportunity hidden in the pain of economic downturns.

This is not about taking more risk than is appropriate for you. Instead, it's a chance to do two things: First, fix your mix--in other words, rebalance your portfolio. And second, remove cash you have from the sidelines and put it to work in sync with that asset allocation.

Both those things will give you the opportunity to capture some significant bargains.

There's just one caveat: we are talking about investing for the long term here. Money that you need in the next three to five years doesn't belong in the stock market now--or ever. With that out of the way, here's where the experts say to put your money to work.

The S&P 500.

"When the S&P 500 experiences a day where all 500 stocks decline, it's a pretty clear indication that the market is oversold," says Edelman. "So buy the S&P 500." That's the appropriate advice for investors who have made the decision to hold broad, diversified--and, by the way, low-cost--index funds and exchange-traded funds rather than sectors or individual stocks. …