Volatility is way up. Your stomach, tied in knots by the drop in global equities and commodity prices, tells you that. Fear is back.But like everything else in the financial markets, fear moves in cycles, and that makes this a good time to remind yourself that fear is a short-term phenomenon. It has very little, if anything, to do with the long-term value of a stock or other investment. Fear doesn't change fundamentals, even if it can powerfully shift how much we're willing to pay for those fundamentals. It is dangerous to investors because it can make them forget long-term economic and market trends and abandon long-term winners at temporary bottoms. The best antidote for short-term fear is to run down your list of those long-term trends that you believe will turn some stocks into winners. And then use the short-term market overreaction to fear as an opportunity for building positions that will profit from those long-term trends. In this column, I'm first going to run down five long-term trends that I want to own in my portfolio. And second, I'm going to give you a tip or three on how to buy into these trends with the most safety while the stock market is still in the grip of fear. The odds are, I think, that we've put an end to a period of extraordinarily low stock market volatility that stretches back to 2003. The VIX, the Chicago Board Options Exchange index that tracks the volatility of the Standard & Poor's 500 stock-index options, shows a low reading when investor fear of volatility is low. So, in the complacency that preceded the bursting of the technology bubble in March 2000, the VIX had dropped to an average of just 22.7 for that month. The VIX numbers climbed after that in reaction to the market's bust, seeming recovery ... and bust again. By March 2003, the VIX stood at 30.6.
- Buy nondollar-denominated stocks, such as Nestlé.
- Buy U.S. stocks, such as General Electric (GE), that do big business overseas. They will sell more products with a weaker dollar, and that overseas revenue will be worth more when translated back into dollars.
- Buy gold stocks, such as Newmont Mining and Glamis Gold (GLG).
- If your portfolio is underweighted in any of your long-term trends, use weakness to bring your exposure up to your target level. So, for example, I'd like to have about 15% of my portfolio in gold, given my belief in the inflation trend. This equally weighted portfolio -- all stocks start out with the same dollar investment -- is fully invested at 33 stocks. Right now I hold 30, and three of those are gold stocks: Newmont, Glamis Gold and Anglo-American (AAUK). So, I'm going to add another gold stock by repurchasing GoldCorp (GG) to bring my exposure up to 13%.
- Don't buy randomly just because a stock is cheaper than it was, and don't load up on sectors just because they've taken big hits. Keep to your asset-allocation goals, whatever they are. An unbalanced portfolio is dangerous at any time.
- Within your asset allocations, use weakness to trade up. So, for example, with this column I'm going to sell my position in Sysco (SYY), the giant U.S. food distributor that has held up well in the selloff, but that recently announced disappointing inflation news, and buy Central European Distribution (CEDC), a Polish producer, distributor and importer of vodka and other alcoholic beverages that has been hammered by bad news on an acquisition attempt and by the selloff in the emerging markets. The switch increases my nondollar holdings in the food sector.