By The Editors of Wealth Management Exchange

"Bungee jumps may be exhilarating, but they can also be frightening. They end up with the participants much lower than when they started-and with their safety hanging by a thread." That's how The Economist recently described what investors have experienced.

The torrent of poor economic and financial news continues to punish the markets on a seemingly daily basis. Glimmers of hope may sometimes lead to a big day on Wall Street but these are soon dashed by more bleak economic data, another major company in need of a bailout or further displays of ineptitude by a sharply divided Congress.

Clearly, with near unanimous agreement that we are in the midst of a global recession fixing the economy is priority number one. According to Peter Bernstein, the road to recovery begins in the household sector. "In earlier recessions, the household sector responded to the pressures of recession but was not the driving force behind those pressures," says Bernstein who is a financial historian and editor of Economics & Portfolio Strategy. Now because of the mortgage crisis induced by falling home prices, millions of people-including those who acted prudently-are in deep trouble with no clear path back to good jobs and steady incomes."

Crisis of Confidence

The consensus among some of the top chief investment officers and asset managers is that the current crisis is really crisis of confidence. "The last few weeks have been a breathtaking reminder of just how dependent capitalism is on confidence," notes James Paulsen, chief investment strategist at Wells Capital Management. "If faith in the process is lost, asset prices become totally divorced from their future earnings potential (i.e., discounted future cash flows) and are left only to the vagaries of emotional nightmarish scenarios."

In fact, the perpetual cries from the media and the pundits that depression cannot be far off only continues to fuel these emotional nightmarish scenarios. But then there are the voices of professional wealth managers who now see their role as trying to calm investor fears and perhaps restore some confidence.

"Aggressive government actions are being aimed at restoring liquidity and confidence in the financial system and their full benefits should be recognized over time," writes Dianne F. Lob, chairman, private client investment policy, Bernstein Global Wealth Management in a hopeful paper to investors. Unlike some, Lob believes that adjustments to the problems that caused the current crisis are moving ahead.

Market Bottoms and Investment Strategy

On the day after the Dow dipped below 8,000 for the first time since early 2003, Ed Yardeni, president of Yardeni Research, declared, "When you break through these kinds of levels, it strongly suggests that there's more to go." If some top investment professionals believe that the market will continue to struggle, than even the best intentions of Congress,The Fed, The Treasury Dept. and so on will not go far in breaking the confidence crisis.

Many investors and wealth managers have turned to charts and other technical indicators hoping to anticipate a near-term bottom in the ongoing bear market. "These students of price trends and patterns were briefly encouraged that the S&P 500 held its ground above 800 and dramatically rallied after dropping to its lowest level in five years.," says Orie Dudley, Jr., chief investment officer, The Northern Trust Company. But then the Dow dropped below 8,000. "Successful tests, pullbacks and consolidations are the necessary ingredients for a new bull market to finally form," added Dudley.

It is too soon to conclude a sustainable bottom has actually been established. Dudley is advising investors that it is still too early to add risk to investment portfolios, as the economic cycle contracts and corporate news disappoints. But investor expectations for the economy and earnings are increasingly realistic and appropriately pessimistic - everyone now acknowledges the world has entered a sharp, deep recession. "And markets appear now to be selling below 'fair value.' In short, we believe some of the necessary ingredients for a true market bottom - attractive valuations, appropriate expectations and a technical base - are evolving," comments Dudley.

During this period of investment turmoil, most wealth managers are advising high net worth clients to stay diversified and avoid trying to time the market. James Paulsen of Wells Capital Management says investors should not confuse volatility with risk. "For investors, volatility is a temporary irritant that should be mostly ignored. Certainly it should not force investors out of the market nor keep additional cash on the sidelines," he notes. He makes the distinction between traders who need to manage volatility which could wipe them out if incorrectly positioned and investors with strong diversification and long horizons. "Better to hold your nose about volatility and stay focused on the real risk/reward ratio." On a sustained basis, think about how much lower market values can fall versus how high equity prices could rise when confidence is restored.

A similar view is voiced by Dianne Lob at Bernstein Global Wealth Management. "Security prices across the global markets appear to be too deeply discounted in reaction to fear. These extremes are creating the potential for extremely high returns once the recovery unfolds," she comments. She says Bernstein is taking advantage "of this historic opportunity" to own companies that are leaders in their industries at very low prices. "These companies are market leaders, are profitable and have strong balance sheets (many have no debt) and limited liquidity needs in the near term." She concedes that many of these leaders will see their earnings fall but they have the capacity to weather the storm.

Finally there are those who look for a special investment trend or theme and leap on it. We recently returned from a trip to Calgary. Companies in Western Canada are flourishing due to the demand from emerging markets for all kinds of natural resources. Others continue to believe that the demand for energy efficiency and products that reduce global warming are keys to future investing. Certainly there is a trend toward investing in companies that contribute to infrastructure development in emerging markets and in the U.S.

"The long-term growth of the world economy is my theme," says Gregg Ireland, senior vice president, Capital World Investors. He notes that about a third of the world's population was left out of global growth and will now start to catch up. What are these people going to need? What will they buy? "I start out with a shopping list of companies serving these needs and then I look for opportunities to invest when stocks decline, as they have recently," comments Ireland. "I also like finding companies that provide solutions for big problems such as global food shortages and increasing health care needs."

So What's An Investor To Do?

These are clearly stressful and unprecedented times. Hopefully, you had a fully diversified portfolio before the crisis began. If so, and you have an aggressive and long term outlook, rebalancing your portfolio to rebuild your equity allocations makes a lot of sense. If you are more cautious, most advisors recommend that you not increase your equity exposure at this time and discuss with your advisor upgrading your allocations within your equity and bond portfolios to quality companies with good long term business prospects and balance sheets that can survive a severe recession. But remember, cycles are part of economic life, and the worst thing one can do is let our emotions force us to sell equities and bonds at the bottom of a cycle.