What To Do If We Really Are In A Bear Market

The stock market has taken a dramatic plunge over the almost past 3 months. However, today it looks like it might have found a temporary resting spot. At one point today, the NASDAQ looked like it was in the biggest amount of trouble with the technology index going as low as 21% from its high in 2007. If the stock market would have closed at those levels, the tech sector would officially be in a bear market.

Fortunately, the markets put in a strong rebound and put investors’ nerves at rest, at least for the time being. Are we out of the woods? Well we have to look at how bear markets work. On the front page of the Prudent Money website I illustrated how the stock market tends to respond in bear market environments.

Between September 2000 and March 2001, investors LOST -26%. YIKES!!
Between March 2001 and May 2001, investors GAINED 17%. YEA!!
Between May 2001 and September 2001, investors LOST -26%. YIKES!!
Between September 2001 and March 2002, investors GAINED 21%. YEA!!
Between March 2002 and July 2002, investors LOST -31%. DOUBLE YIKES!!!
Between July 2002 and August 2002, investors GAINED 27%. YEA!!!!
Between August 2002 and October 2002, investors LOST -19%. YIKES but YEA it is over with.

It is exceptionally volatile. This is the problem with bear markets. The market will plunge in value. Then it will make huge gains. Investors will feel as if things have turned around. Then the market plunges again. It is hope to despair to hope and vice versa.

Do I feel like this is over? My stance has been all along that we could experience a bear market in stocks. I do think that we are in one. The problem causing the drop in stocks is far from solved. So, what steps should you take now?

1) Don’t Panic – You cannot make rationale decisions when your emotions are running wild.
2) IF you feel like we are in a bear market, then reduce your stock holdings as the market takes a break from the selling and increases in value. Also keep in mind that you might be wrong. If the market just turns back into a bull market, also know that there is a good chance that we will see THE bear market sometime in the next year or so. Either we see THE bear today, or THE bear tomorrow. Ultimately, I don’t think that we escape the bear.
3) If you are just on the fence, evaluate how much money you have made in the last 5 years being invested in a bull market. Determine how much of that you are willing to risk. Draw a line in the sand that you are not willing to cross.
4) If you are going to reduce your stock holdings, reduce them into strength. Look at the chart above and how the market does go through periods of big returns in the midst of bear markets. Make sure and use that to your advantage. If you are unsure as to the percentage in stocks, read this study to see how much risk you might be taking.

The bottom line is to prevent panic and emotion by having a game plan and knowing what you are going to do in the event that your game plan is wrong. Most importantly, don’t make any of those decisions without God’s peace.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.