How to Average-In: Tempur-Pedic, InFocus, Disney

This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.

I had a question from a reader last week that intrigued me all weekend. He felt that if his time horizon is 20 years or longer, shouldn't he be averaging into the market right now?

I contemplated this over the weekend as I sat poolside with the new George Pelecanos novel (for fans of crime fiction who have not read him, do so now -- he is the master of the art) and enjoying an unusual warm, low-humidity weekend. The answer I came up with is yes, if you have that long a time horizon, I probably would advise that strategy.

I have two caveats to this. One, as Warren Buffett once remarked, if you cannot stand a 50% drawdown, do not invest in the stock market. The second caveat is that rolling 10- and 20-year terms that include the start of a recession will have much lower than average stock market returns. History tells us you will have a positive return over a 20-year investment in the stock market. It does not guarantee that it will be a great return or that you will not experience significant drawdowns.

We are down around 20% from the highs, but that does not meant we have to stop here and go up. The current economic and earnings outlook remains gloomy at best. Standard & Poor's predicts a recession that it expects to last at least through the first half of 2009. That tells me a bottom is at least six months away, even for an anticipatory stock market.

In the collapse of the Internet bubble, we saw prices fall over 50% from peak to trough between 2000 and 2003. The economy and financial situation are much worse right now, and to complicate matters further, the Fed has bungled badly. Real estate is not done falling, and credit will remain tight for some time to come. I can easily see a total decline that reaches that level.