Check your portfolio and pick up some bargains now

ByABC News
November 16, 2008, 1:48 PM

— -- Q: What kinds of stocks, small, midsize, large or international, tend to rally first after a recession?

A: Unless you think the current crisis marks the end of the global economy as we know it, investors who have a decently long investing horizon and the courage to buy and hold through scary headlines will likely look back to 2008 as a great buying opportunity.

Your question goes to the heart of the matter. If you have limited funds, it's natural to want to invest in assets that are best positioned for the recovery. While history doesn't have to repeat itself, it can provide some lessons that may or may not pan out in the future.

Let's look at what happened in the wake of the tech bubble. Shares of large companies were decimated not only by the tech implosion but also by the accounting scare resulting from the Enron debacle. The Standard & Poor's 500 lost 9.1% in 2000, 11.9% in 2001 and 22.1% in 2002.

So, what areas led the market out of the mess in 2002 and 2003? International value-priced small companies charged higher in 2002, 2003 and 2004, according to IFA.com's Periodic Table of Investment Returns available here (pdf). Real estate investment trusts and emerging markets stocks were also strong.

Going back further, the last big market disruption occurred in 1990, when the S&P fell 6.56%. In 1991, emerging markets lead the way, followed by U.S. small-company stocks. Real estate stocks were also strong, especially in 1992.

Does this mean you should be buying small-company stocks, emerging markets and real estate stocks now in anticipation of a turnaround? Not necessary. But if you're building a diversified portfolio that calls for those asset categories, now is a good time to make sure they're represented in your holdings.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.