It's Not What You Buy but How You Buy It

Obscene levels of volatility have made the market feel like a rigged casino, and the flow of dismal economic data promises only to get worse. So if putting idle cash toward building a bomb shelter feels like the right move, fine, but you'd be better served by buying securities.

Don't take our word for it. Warren Buffett is buying U.S. equities with his personal account. Bearish Jeremy Grantham sees buying opportunities for "brave value managers." Barry Ritholtz, chief executive and director of research at FusionIQ, has been bearishly calling this calamity for years. He's buying, too.

The key to success is not what you buy but how you buy. It's unimaginable now, but at some point we'll look back on these days as perhaps a once-in-a-generation opportunity. After all, every stock chart tells the same story: one of missed chances. Below you can see an approximation of the smoothing effects of dollar-cost averaging, the strategy of making investments at regular intervals regardless of whether the market is up, down or sideways. The S&P 500's 30-day moving average over the last 10 years presents a gentle curve vs. the jagged peaks and valleys of daily trade.

None of this means that the market has bottomed, of course. Indeed, that process can take months to run its course. Stocks are likely to rally and plunge and rally and plunge for some time. Mighty blue chip Alcoa (AA), for example, has a trailing price/earnings ratio of 5. A few days ago it fell below 4. No one knows how deep or long the recession will last, but in either case that's a valuation that would appear to portend a long, hellish global slump and an alien invasion.

That's why it's critical to put money to work methodically over time, says Shahsin Shah, president of SGS Wealth Management, a Dallas financial-planning and investment-management firm. Shah's not one for predictions or market timing. Rather, the idea is to look about two years out.

"Remember that the market and the economy are very different animals," he says. "I think most people would say that the recession is already priced in. So recovery comes next. At some point, at what point, does it price into the market?"

You'll be kicking yourself if you don't take part in that eventual upswing, but you need to mitigate risk and be able to sleep at night. So here's one neat strategy Shah suggests. Take the cash you want to put to work and divide it by your time frame, say, two years. Then divide it again by either four or 12, depending on whether you will dollar-cost average in on a quarterly or monthly basis. Buy into a diversified and balanced range of equities and bonds. Domestic, international and small-cap stocks all belong.

Remember to stick to that quarterly or monthly plan despite the inevitable market turbulence. Volatility is why you're dollar-cost averaging in the first place. Buy on the occasional dip if you're feeling especially brave. And don't forget to rebalance regularly if weightings in your portfolio get out of whack.

As for allocation, one simple buy-and-hold strategy that historically beats the market is the so-called lazy portfolio. This typically consists of four to a dozen cheap index funds or exchange-traded funds. Money manager Merriman Berman Next publishes suggested lazy portfolios for free on its FundAdvice.com web site. The portfolios are based on readily available ETFs and mutual funds from Vanguard, Fidelity and T. Rowe Price (TROW).

Resisting the urge to panic is to be applauded at times like these. It is commendable, no doubt. It takes even greater courage to buy low.