Remember The One Stock You Must Buy? It was:

  1. Small.
  2. Led by a dedicated founder.
  3. Fiscally conservative.
  4. Profiting from a wide market opportunity.

And while it's always a good time to buy a stock that possesses those four core traits -- think of big winners such as Home Depot (NYSE:HD) or Urban Outfitters (NASDAQ:URBN) back in the day -- the problem recently has been that due to the crippling downturn, investors aren't interested in buying any stocks at all.

Is that you?
A recent BusinessWeek article declared it loud and clear: "More investors are shunning stocks." And what are they doing instead? The anecdotal answer from the BW article was cash, and that's backed up by hard data. According to the Investment Company Institute (ICI), equity mutual funds saw net cash outflows of more than $20 billion at the beginning of March -- money that only now (after the recent rally) is starting to move back into stocks.

Now, depending on your individual situation, moving from stocks to cash can be a savvy move. That's particularly true if you're in or within five years of retirement, unable to sleep at night because of stock market volatility, or looking to spend some of that cash in the near term on a home or tuition and need to keep its value stable.

Know, however, that not all cash is created equal.

Say what?
First, if you're hoarding your cash in small bills in your mattress, you're earning no return (and that lumpiness could be what's keeping you up at night). Factor in inflation, and those dollars in your pocket are actually losing value over time.

Now, we've been "lucky" since November in that the current economic downturn has caused almost zero inflation. But given the fact that our government is currently printing copious sums of money to pay for stimulus spending, I do not believe that low inflation rates can last.

That fact also makes owning long-term Treasuries a dicey proposition; 30-year Treasury bonds are yielding an absurdly low 4.3% at present. Given historical inflation rates, that means that if you buy one, you're probably dooming yourself to 30 years of 1% annual real returns.

Is that a number you're willing to accept for the next three decades?

Warren Buffett wouldn't
Writing in his recent letter to shareholders, Buffett noted, "The investment world has gone from underpricing risk to overpricing it. ... When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

What he means here is that investors -- individual and institutional alike -- have grown so concerned about protecting their principal that they're paying enormous premiums (in the form of paltry rates of return) to own government debt. This is particularly dangerous at the 30-year end of the yield curve, because as soon as interest rates rise or investors get comfortable with stocks and corporate bonds again, the values of these Treasuries will plummet and you'll be locked in to 30 years of awful returns.

So there you have it: The 30-year Treasury, the one security you must not buy.

But you said
Earlier, however, I noted that you should consider cash if you're in or nearing retirement, fretting about volatility, or looking to spend cash in the near term and need it to hold its value. If that's you, continue to stay away from the 30-year end of the yield curve. Instead, buy something like Vanguard Short-Term Bond (BSV), a liquid ETF that holds Treasuries with maturities that do not exceed three years. Though you'll sacrifice some yield here, you will protect the value of your cash and retain flexibility relative to interest and inflation rates.

After all, your goal in going to cash today is not to earn 4% for the next 30 years, but rather to insulate yourself from some of today's wild swings. Short-term bonds will do that without tying up your capital.

One bold prediction for 2039
Because think about what will happen in the world over the next 30 years. We'll pull out of this economic crisis and experience several more bull and bear markets. There will be new technologies and significant changes in the global economy. Fortunes will be made.

At Motley Fool Global Gains, we believe you can earn far better than 4% annual returns by focusing on a few obvious, long-term themes like this one: In 30 years, the size of the middle class in China will be far larger than it is today.

We can't find anyone, anywhere who will refute that. And given that the Chinese middle class today numbers somewhere between 100 million and 150 million, that means we're staring down a spending class of (to take a shot in the dark) some 300 million to 500 million people -- a number greater than the current U.S. population.

What companies will benefit from this societal shift? Here are a few we're watching at Global Gains:

Company

Will Benefit Because ...

Perfect World (NASDAQ:PWRD)

China already has the world's greatest number of Internet users, and that number will increase as more and more Chinese citizens make money and move online.

Luxottica (NYSE:LUX)

Designer sunglasses are the first step toward luxury living.

Best Buy (NYSE:BBY)

It’s a growing player in China that should benefit as consumer electronics demand in the country increases.

You know what to do next
Neither predicting an increase in the size of China's middle class nor finding the companies that will benefit is rocket science, but it will take a disciplined investor like yourself to buy these stocks amid the current volatility and stick with them over the next three decades. Yet if these three stocks on average don't outperform the 30-year Treasury bond through March 2039, I'll eat an entire bowl of "tongue-torching" Sichuan peppers (and we'll post the video here on Fool.com).

If you're looking for some help navigating the current volatility, I encourage you to sign up to receive all of our free dispatches that we'll mail back during our upcoming Global Gains research trip to China. Simply enter your email address in the box below.

This article was first published March 19, 2009. It has been updated.
 
Tim Hanson is co-advisor of Motley Fool Global Gains. Find him on Twitter. He does not own shares of any company mentioned. The Fool owns shares of Best Buy. Best Buy and Home Depot are Inside Value picks. Best Buy is also a Stock Advisor selection. Thirty years from now, the Fool's disclosure policy will be struggling through its midlife crisis.