Get Bear'ed Up

Now do you believe me? We are finally, officially in a bear market - that is, down more than 20% from the high of last October. My article for SmartMoney.com last March stressed the glaring evidence, and tried to convince investors who remained in a state of denial to be prepared. My view then was that the bear market would endure well through this year and next year, and that your investing should encompass this wary perspective. I view the 167 point drop in the Dow Jones Average on July 2nd as the beginning of the bear market, not the end of the recent market sell-off.  Don't think for a minute that the 152 point rebound indicated any sort of respite.  Days like these just keep investors sucked in and marginally hopeful.

The common perception is that bear markets may last say, six months. Wall Street and the media are eternal optimists. The Street is loath to address bad times and is never focused on risk. This I pointed out in my May article, "Wall Street Won't Tell You It's a Bear Market". The next spin you'll hear from the Street is that since this market fall off commenced last October, it has already existed for nine months, and thus close to the recovery phase. What you won't hear is that in the 1930s the bear market endured for more than a decade, and in the 1970s it lasted some three years. The average bear market, according to SmartMoney, ranges one a half years and falls 37 percent. There have been four bear markets since 1973 and in each occurrence, as Barron's observes, after the initial 20 percent drop the S&P 500 Index fell another nine to 35 percent. This bear market could run for a period of years not merely months. The recovery may not commence until sometime in 2010. And don't be misled by interim five percent rallies. There were a dozen or so of these during the 2000-2002 bear market.

Your investment portfolio better be tailored for a difficult time ahead. Get bear-ed up. It's not too late. Have your investment holdings dropped by 10 percent or more recently? That's nothing compared to the risk of further loss over the next year or so. Perhaps the strongest message in my entire book, Full of Bull, is protect your capital. It's easier to recover a 10 percent loss than 30 or 40 percent. You cannot rely on Wall Street for objective advice in any market conditions, let alone during an ominous, deteriorating scenario. Brokerage firms are fighting for their own survival.

Act. Take charge of your investments. Establish a cash position, a material one, I mean at least 10-20 percent of your holdings. Eliminate growth stocks or any equity carrying a hefty PE ratio. This is not the time. Be sure your stocks are dividend payers, with reliable earnings streams, and value priced with modest PEs. Bonds and fixed income are always important anchors, now more than ever. I'm okay with a short position or two as a hedge. Do anything necessary to avoid major losses going forward. Your portfolio needs to be bear-market resistant or at least bear-market retardant. Do it now. Don't come back to me in a month or two after losing another 25 percent, wondering what to do then.