Bear Market Thoughts

By Ulli G. Niemann
Jan 7, 2008

In case you missed it, reader G.H. commented on last week’s Fund Tracker update as follows:

This might be a good time to point out that buy and hold (hope) “lazy portfolios” diversified across asset classes and countries are not doing so well.

Personally I am in the camp that says there will be no “decoupling” of international economies when the US economy buckles under the weight of the debt-burdened US consumer.

There will be no place to run/hide except in shorts when the lights are finally put out on the credit party.

I have to agree with his view. This reminded me of Paul Farrell’s recent article with the subtitle “Ten resolutions that will help you survive the coming bear market.” He offers 10 resolutions and ends by saying that you should “play it conservative, because 2008-2010 will repeat the harsh lessons of the 2000-2002 bear-recession.”

While some of his resolutions are sensible, others are not. He continues to suggest investing your nest egg in low-cost, no-load index funds. While that makes sense in a bull market, Paul obviously has not learned from the lessons the last bear market has taught:

A bear market needs to be avoided at all costs, or you will again join millions of mislead investors who will watch their (bullish) portfolio sink into oblivion. To say investing for the long-term is the answer when buying and holding is simply not acceptable, because who wants to go down with a bear market and then wait some five or more years just to make up the losses?

I have heard from readers who went down with the last bear market holding low cost index funds, and who have struggled to get back to even. Some had to postpone their retirement indefinitely. Maybe this whole issue of bear market avoidance makes more sense to you if you realize that your financial life is much shorter than your physical life. It’s one thing to let your portfolio slide 50% when you’re in your in your 30s, but it quite another to do so when you’re in your 50s or older.

There is not enough time to make up the losses. Remember, we are all working against a deadline, which for most people is retirement. Don’t mess with bullish investment strategies in a bear market and vice versa, because you will pay the price via a hefty portfolio haircut.

Original article here.
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