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Panic, fear, and an emergency 75-basis-point cut in the Fed funds rate. Yes, dear readers, it's time to start nibbling at asset classes that have fallen on hard times.

But let's not go crazy. We're not in the business of calling market bottoms, or tops. Nobody knows how long the selling will last. It could be over tomorrow, unless a protracted bear market extends the pain for months or years.

This much, at least, looks clear: strategic-minded investors with long horizons should be taking advantage of the selling. Timing, of course, will be critical. Alas, there's no definitive bell-ringing ceremony at the bottom of bear markets. Clarity only arrives with hindsight. Nonetheless, waiting for clarity is sure to come with an opportunity cost. Once it's obvious that the trough is past, market's may have already bounced higher.

Overall, the risk of waiting too long to exploit a cyclical repricing of securities is balanced by the risk of pulling the trigger too early. In a perfect world, investors would buy at the bottom and sell at the top. In the universe we all inhabit, however, imprecision rules and so returns suffer relative to the ideal, albeit in varying degrees depending on the investor.

Despite the risk of buying too early or too late, few can afford to stand still and watch the world pass by. Lower prices equate with higher prospective returns. And so, after five straight years of bull markets in just about everything, the cycle has turned, risk has been reshuffled and a new deck of prospective returns has been dealt. We don't pretend to have the answer as to when it's time to buy. On the other hand, we're reasonably sure that the year ahead will offer compelling opportunities for rebalancing among the major asset classes. The source of this new opportunity: the churning of economic and financial risk.

That said, let's emphasize once more that the primary risk in the months ahead is one of balancing the risk of buying too early versus buying too late. At the same time, level-headed investors shouldn't fret over the risk, but they shouldn't ignore it, either. Most of us, perhaps all of us, will err on one side or the other. The good news is that the timing risk can be mitigated. Because we don't know when prices will stop falling, or start rising, prudence suggests a bit of time diversification is in order.

Let's say you've been rebalancing these last few years, selling into strength on the margins and raising weights in lower-risk betas and cash. Now what? You could throw caution to the wind and reinvest everything in risky assets on a single day. This approach will, of course, maximize future returns - if you're right. If you're wrong, you'll maximize losses. But that's just rank speculation. An alternative approach is rebalancing gradually over the coming months by purchasing asset classes periodically, otherwise known as investing.

Perhaps the waves of selling will be isolated in one or two asset classes, perhaps not. Perhaps the waves of selling will come in one concentrated burst, or perhaps it will come in stages, separated by weeks or months. However it comes, the essential point is psychologically preparing oneself for the future and monitoring the shifting sands of risk and reward. History teaches that the greatest buying opportunities often arrive at moments of extreme stress in the financial system. Positioning one's mind, and one's portfolio, to exploit such moments is vital for generating something other than mediocre performance for the long term. For those who keep a clear head, financial blood in the street represents opportunity.

Source: Blood on the Street Means Opportunity