Market Outlook: Smart Investing When Stocks Are Volatile

After the worst week for stocks in four years, investors might be tempted to put all their money under the mattress.

While market pros expect further declines in the coming weeks, they also think smart investors can take advantage of the market's volatility.

"I think the main driver of the market will be getting the correction out of the way," said Neil Hennessy, President and Portfolio Manager at Hennessy Funds. "Take the emotion out of the equation and the underlying fundamentals of historically low interest rates, low unemployment and low inflation are too strong. At some point and time, people are going to come in and buy. Don't fear the correction."

Still, analysts say long-term investors should resist trying to time the market. Instead, they should take this time to re-evaluate their portfolios.

Wrong Investment Strategy

"'Get in and get out' is not an investment strategy," said Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. "If you want to take a look at your long-term portfolio and you have a lot of international investments, you may be underweight U.S. equities. But this is something that should be onging, not in reaction to a one-day event."

"No one can pick the exact bottom, but if you see something you like, take a partial position," said Michael Metz, Chief Investment Strategist at Oppenheimer. "I think the energy sector, by far, is the most attractive. The valuations are reasonable and the sector is likely to benefit from continued consolidation."

Besides worries about subprime lending and more unwinding of the so-called yen carry trade, Wall Street will be watching for fresh economic data out next week, including pending home sales and the closely followed monthly employment report.

"The psychology in the market has changed for sure, although fundamentals haven't changed that much," said Schwab's Sonders. "I think we have been in the mode of expecting a soft landing, so any economic news that would increase the chances of a recession could definitely be a driver such as the employment situation."

Above all, investors shouldn't expect any sudden end to the market selloff.

Won't Turn on a Dime

"It's unlikely, in my view, that the market is going to turn on a dime because there was some pretty bad smoke that we saw in the market on Tuesday in terms of how fast it declined," said Michael Weiss, President of Weiss Research.

Weiss says there are ways to take advantage of the volatility.

"I especially recommend international ETFs," he said, referring to exchange-traded funds, which are mutual funds that trade like stocks. "Another part of your money should be in investments that benefit from volatility in the U.S. market such as havens of safety like Treasury notes and gold."

Tom Ognar, Wells Fargo Advantage Growth Fund Manager, believes the volatility has created two key opportunities.

"Growth stocks are the biggest opportunity in the market right now," Ognar told CNBC.  "The premium is at a 30-year low, so you can buy the fastest growing stocks relative to the rest of the market for as cheaply as you could have (at any time) in the last 30 years."

Ognar recommends the Chicago Mercantile Exchange , saying the exchange had the highest volume day ever in its history this past week.

He also likes Google , noting the stock is trading just north of 30 times 2007 earnings, but the company is expected to grow earnings around 45% this year.  Ognar personally owns both stocks.