Like many of my colleagues at Morningstar Investment Services, I live in suburban Chicago and take advantage of a commuter train known here as Metra. For the most part, Metra has a reputation for running on time, so if you're running even a little bit late for the station, you're likely going to be waiting for the next train.

To avoid that scenario, I arrive at the station two to three minutes early. However, I invariably find that, as I'm approaching the train, there are one or two people running past me to catch it, presumably because they think it's leaving immediately. I'm typically dismissive of them, reasoning that they have the wrong time. But they always inspire a few others to start running—and, as more people get in the act, I start questioning my watch and join the sprint to the train's doors. Once I've boarded, reality is quickly restored because the train—as my watch indicated all along—still has a couple of minutes before it leaves the station. Yet I partake in this sprint often, reacting to the fact that I see others running.

This behavior is also true of investors, who often act with a herd mentality. For instance, as the market has slipped in the past year, more investors have switched from being optimists to being pessimists. After all, newspapers are full of stories about the weak dollar, rising inflation, skyrocketing oil prices and rice hoarding.

We would be wrong to dismiss these realities. While the number-crunchers can argue about whether we're technically in a recession, there is no doubt that there has been a significant slowdown that is likely to persist into the fourth quarter of 2008. That said, we maintain our belief that much of the bad news is reflected in asset prices, particularly stocks and bonds. While the litany of bad news is frightening, the reality is that to make money over the long haul, a good long-term investor has to lay the groundwork during rough times and buy low.

It is this philosophy that is driving our portfolio positioning today. The following is a sample of our current views.

Fixed Income

There is no doubt that the easy money has been made in the fixed-income arena. While many investors continue to prefer the relative safety of Treasuries, we think that they represent poor values today; it's tough to look past the negative real yields of these securities.

That said, we are looking elsewhere in the fixed-income field for ideas—and are finding interesting options. In particular, we are favoring investments in municipals, high-quality mortgages and bank loans (the short-term secured debt issued by corporations). It has been tough sledding for investors in these securities for much of 2008, but that's also why there are opportunities amid the seeming chaos.

One fund in particular to which we've increased our portfolios' allocations is TCW Total Return Bond Fund (TGLMX), which invests mainly in mortgage-backed securities that are primarily AAA-rated bonds. Although the fund was defensively positioned for most of 2007, as a mortgage-backed securities specialist, TCW was in a unique position to capitalize on the recent turmoil in the credit markets, and added to higher-rated, more-secure levels of mortgage pools consisting of prime and Alt-A mortgages. Although not subprime, these securities have been beaten down as investors have fled to the safety of Treasuries.

One area that we haven't warmed to yet is high-yield, where we expect defaults to rise. And we are less enthusiastic about Treasury Inflation-Protected Securities from a value standpoint. That said, if defaults do pick up—as we expect—the high-yield market could begin to look more enticing. We're just not there yet.

Equities

On the equity front, we continue to think that the Federal Reserve's actions to stabilize the financial system will work and should lead to a turnaround in stocks. This view is drawn not only from our assessment of macroeconomic conditions, but, more important, from our belief that developed-market stocks in particular are appealing. Consider, for instance, that Morningstar's equity analysts believe that, as a group, United States stocks are more than 10% undervalued.

While it is fairly clear that the economy may continue to experience a rough time for the next few months, the question we always ask ourselves is whether the market already reflects that reality. Our belief is that it does, and that the past year's sell-off has driven stocks lower to reflect that reality. While some investors argue that the pain hasn't been severe enough thus far, it's our view that the areas that have been hit hardest in the past year (such as financial services ) deserved to be—and have already corrected steeply, with many prominent financial services companies seeing their stocks fall in value between 60% and 90% within a year.

Of course, no question about stocks today can be answered without talking about commodities—oil, in particular. We believe that oil prices may pull back by year's end. With the global economy slowing, it is easy to imagine that oil demand will fall faster than expected. More important, as more and more firms get into the race to find alternatives, it is not far-fetched to believe that some of the investments being made in this area can only serve to dampen oil demand in the years ahead.

One final note is that while we have been cautious on emerging markets as a group, the steep sell-offs in many of those markets have tempered our view. While we have not increased our portfolios' allocations to these markets yet, they are certainly not as overvalued as they were just six months ago.

Kunal Kapoor, CFP, is president and chief investment officer of Morningstar Investment Services, Inc., a registered investment adviser and wholly owned subsidiary of Morningstar, Inc. (www.mp.morningstar.com). The opinions expressed in this article are his own and don't necessarily reflect the opinions of Morningstar, Inc. or its subsidiaries.