Surviving a Bear Market

Even the most disciplined, level-headed investors see tough times now and then. Accounting scandals, wars and other bad news take their toll on the markets.

But don't give up on stocks. Despite depressions, recessions and frequent corrections, a single dollar invested in diversified shares of stock issued by large companies in 1925, assuming reinvestment of dividends, would have grown to almost $2,280 by 2001.

Other Bear Markets in History

The bear market of 1973—1974 was severe. If you invested $10,000 in early 1973, by 1974 your investment was almost halved. But if you stuck it out in well-chosen stocks, you would have seen the market rebound 38% in 1975, and recovered the $10,000 in just two years.

The crash of '87 also made investors jittery. On Oct. 19, 1987, the Dow lost 22% of its value in one day. Nonetheless, by the end of 1988 it had recouped most of this value, and by 1989, all of it and more.

Heed the lessons of history, and have patience.

How to Survive a Bear Market

Don't panic and sell unless you urgently need cash right away. If you've made well-thought-out investment choices, stay the course in down times until the market reverses direction.

Down times can sometimes be a good thing. Research the companies you own. Check financial data, company news, earnings estimates—all easily available online. Your stock might be a bargain right now. You could even buy more, depending upon your risk tolerance.

Diversify for Defense

A diversified portfolio can reduce investment risk. Investors who bought only dot-com stocks in 1999 soon regretted it.

Invest in a variety: both stocks and bonds, international funds, real estate funds, certificates, money market savings accounts and stocks issued by large and small companies in different industries.

For instance, in hard times, companies making necessities do better than companies making big-ticket items. You can put off buying a new car, but you always need groceries.

All well-constructed portfolios require periodic reallocation, too. Rebalance your holdings once or twice a year to keep them in line with your goals.

Dollar Cost Averaging

Investing regularly by putting the same amount into stocks every month or quarter does not eliminate risk, but it does reduce average cost per share in fluctuating markets. With dollar cost averaging, you buy more when prices are down and less when prices are up, keeping you from buying all of your shares as prices peak.

Successful dollar cost averaging means investing through thick and thin, over a period of many years. Regular automatic contributions to a 401(k) plan help to enforce the discipline of dollar cost averaging. Reallocating annual 401(k) holdings may let your account grow even more.

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