discovered after the recent bull market ended is that you can and
will lose money at some point if you stay invested for any length of time.
That’s the bad news. The good news is that you can protect your portfolio
from the worst effects of most bear markets. The trick is knowing a
bear market from a market correction.
RISK AND INVESTING
Despite all the talk about a “new economy,” there are fundamental truths
about investing that haven’t changed. The first is that investing involves
risk: There is a chance you will lose money. The more you stand to gain,
the higher the risk.
It’s ironic that an investing community that watches and benefits
from markets climbing to dramatic heights is shocked when they collapse.
The Nasdaq Composite Index went from over 5,000 to 2,600 is less than
a year. People were shocked and angry. Those same people didn’t mind
when the index was up 80 percent the year before!
LOOKING FOR BEAR SIGNS
Investors should watch a number of market and economic indicators for
signs of a bear. Unfortunately, it is not always easy to identify bear markets,
because not all bear markets are equal. Interest rates cause some; others
find a home during a recession; some are triggered by political unrest
or a war that no one saw coming—the invasion of Kuwait (as well as other
factors) triggered the bear market of 1990.
When markets become overpriced, watch out. At least, that’s the conventional
wisdom. Market observers repeatedly sounded the warning during
the 1990s bull market, but if you had heeded the early warnings and retreated
to safer investments, you would have missed most of the strongest
bull market in history. When the bubble finally burst, pundits were shaking
their heads with an “I told you so” attitude. Like the boy who cried
wolf too often in the fairy tale, eventually they were bound to be right.
AVOIDING TRAPS
“Bear Traps,” deals with three difficult issues for investors:
■ Market timing, or trying to buy at the absolute low and sell at the
absolute peak
■ When to sell a stock
■ When to sell a mutual fund
Market timing is a disaster waiting to happen for investors who think they
are smarter than the market. No one, no matter what they say in their advertising,
can consistently call the market correctly, and neither can you.
You don’t know where the top is and you don’t know where the bottom
is. (I don’t either.) However, there are solid ways to make investment decisions
that take the guessing out of the process. Bear markets, as noted
earlier, often disguise themselves as corrections or something else.
There are two sides to every investment decision: when to buy and
when to sell (although the buy decision seems to capture more attention
than the sell decision). Protecting your portfolio may mean moving out
of one class of investment and into another. Do you have an exit plan? We
will look at the process of selling stocks and mutual funds in detail.
BEAR YOUR ASSETS
You know that diversification is a powerful safeguard against an unstable
market. Asset allocation is how you go about that diversification. Many
investment professionals maintain that how you allocate your assets is
more important than picking the individual assets. As a rule, you want assets
split among stocks, bonds, and cash. A number of factors determine
how much you should allocate to each.
BEAR TRACKS
“Bear Tracking,” takes a look at some strategies from two perspectives:
age and time horizon. Our poor soul at the beginning of this chapter
who lost one half of her retirement portfolio the year she planned to
retire would have benefited from reading these chapters. We will look at
short-term strategies in particular, since almost everyone has financial
goals that are less than 20 years down the road.
Are bear markets a time to pick up some bargains on decimated
stocks? This strategy walks very close to market timing; however, with the
proper research, you may find some roses among the thorns.
BEAR DEN
Investors nearing retirement are the most vulnerable to bear markets because
they have less time to ride out the storm. What strategies should
you use and when? Part 5 discusses the concerns of pre-retirees and follows
them through retirement. You worked hard and invested wisely so
you could enjoy a comfortable retirement. Don’t let a bear market rob you
of that goal.
Are there “safe havens” in a bear market? Although there are no
completely safe places to hide, you can protect yourself from the worst the
bear has to offer.
BEARSKIN RUG
“Bearskin Rug,” discusses the three major considerations in surviving
a bear market and gives some examples of why they are so important.
These tools and techniques will help you avoid the worst the bear
has to offer. However, there are no “silver bullets” that are guaranteed to
kill the bear.
Investing is about risk, and nothing will change that. You can arm
yourself with information and education so you can make investment decisions
with a reasonable knowledge of their outcome.
Read More : BEAR-PROOFING YOUR PORTFOLIO
