Hello All:

This morning I woke up to the Dow Futures being down 556 points - meaning we were in for a really negative ride today; and as I write this the Dow is down 407.86 points. So I thought that a couple of articles about investing in a Bear Market from different investment writers might be appropriate.

A bear market does not mean you must react with fear and pull your money, or stop contributing to your retirement or savings accounts. As scary as it is, right now your dollar is buying you more stock than it would it a good market. When the market, once again, returns to something more orderly, you'll be surprised how quickly those stocks you continued to buy, will inflate, and your retirement account grow. That's the theory, and it can, and has worked.

Below are two articles from two different sources. I hope you find them helpful.

Enjoy the day!
Gloria

(If you have any comments, I'd love to see some more participation in the "comments" section. Thanks.)


How to Invest Wisely In a Bear Market?
The Personal Financier, Posted by Dorian Wales, Wednesday, August 6, 2008

Bear markets present a challenge for any investor with the end never in sight. How do we invest wisely in a bear market?

Stocks are often hailed as the winning financial asset to invest in for the long term. While stocks offer great potential in return they also hold an equal level of risk. Bear markets serve as a good reminder of the risk-return tradeoff.

During the first half of 2008 stock markets worldwide have taken a relatively severe proverbial beating with major indices dropping %15-%25



Still, a bear market is by no means a cause to give up on stock investments. It’s just another natural phase in the life-cycle of stock investments which are invested for the long-term.Amongst my favorite investment methods is an investment technique which enables us to:

Gradually increase our exposure to the stock market.
Invest in a timely fashion which usually suits our monthly savings.
Enjoy stock returns while relatively limiting the risk we take.
Invest in bear markets as well without dwelling on timing the market.

Dollar cost averaging is a well known investment method which perfectly suits bear markets. Most of us are dollar cost averagers investing timely in retirement plans and other long-term savings.

Dollar cost averaging is basically buying a financial asset or a certain portfolio of financial assets in a fixed timely manner regardless of share price. When prices are low dollar cost averaging results in buying more shares of a certain financial asset or portfolio and while prices are high fewer shares are purchased.

With Dollar cost averaging the average “initial” cost of the portfolio is updating either upwards or downwards with each purchase thus diversifying risk over time.


Naturally there’s a price to dollar cost averaging. Since the investment risk is reduced so is the potential return. Had we invested a lump sum instead the portfolio risk would be higher but so would be the potential return.

There is a lot of criticism directed at dollar cost averaging. Academic research has disproven this investment technique as preferable to lump sum investing.

I believe that for a household investor, much like me, who manages to save some money here and there dollar cost averaging helps ease fears of sharp portfolio drops by easing into the stock market when times are rough.


Poor Long Term Performance Pose
a Risk Even To Long Term Investors

The most common hypothesis is that the stock markets will eventually return to growth patterns and will break previous price records. This has yet to be the case with the Nikkei 225 and the S&P500 since the 1990’s and 2000’s respectively.

Dollar cost averaging has helped small investor take part in the stock market while not risking their sole savings, other than retirement.

If we examine the two stock market indices I mentioned we’ll see that since January 2000 the S&P500 has generated a negative return of 11.2% (-11.2%) without inflation! The Nikkei 225 performed much worse over the past two decades with a negative return of 66% (-66%!!), again without inflation, since January 1990.

The S&P500 since 1999:




The Nikkei225 since 1989:



Dollar Cost Averaging Help Reduce The Risk


Let’s examine what would have happened had we started dollar cost averaging in the worst of times for these two indices. Let’s assume a monthly investment of $1,000 up to today. Out two portfolios would look something like this:



Even with the current crisis and with the S&P500 and Nikkei 225 losing approximately 15% since January 2008 the two portfolios significantly outweigh any lump-sum counterpart. The S&P500 portfolio actually manages to yield a positive return.

Remember, we started dollar cost averaging in the worst possible time to begin investing (right before a big crash).

My goal in this post was to suggest what I believe to be a sound, less risky technique to start investing in the stock market, even if it is bearish. I’ve recently started buying a monthly share of the MSCI world index using dollar cost averaging.

Naturally, I encourage each and everyone to regard everything with the appropriate reserve and carefully examine whether a stock investment is right for you. As always, consulting with a professional is recommended.

Related Posts:
Long Term Investments Are Not Risk Free: The Fallacy of Large Numbers and the Past Decade in Us Stock Markets
Diversifying your risk in the stock market
Know your Portfolio - Three Simple Charts Can Make a World of Difference
How to Protect Your Money From Inflation

Make Money in a Bear Market
From: Kiplinger.Com
By Steven Goldberg
December 4, 2007


Bear markets feel horrible, but, believe it or not, they actually help most investors build wealth.

The economy looks ugly, and the stock market seems poised to fall off a cliff. My suggestion: Cheer up. For most of you, a bear market is a blessing, not a bane.

I'm not kidding. If you're retired and you live off of your investments, a bear market is really bad news. That's why retirees should have enough in bonds and cash to support themselves through stock-market downturns.

But most of us don't need to dip into our investments to pay the bills for years to come. And if you fit into that category -- someone who is still accumulating money for retirement, to pay for your kid's college education or for any other goal -- a bear market can work wonders for your wealth.

Here's why: When the stock market craters, the money you invest buys more shares of stock. So you're actually building up more equity during a bear market than when the market is soaring.

Take the 2000-2002 bear market. As measured by the broad-based Dow Jones Wilshire 5000 stock index, the market plunged a harrowing 44%. It was a nightmare for retirees. But for those of us still working, it was an opportunity to buy more stocks at cheaper prices. The more you bought while stocks were plunging the better you ultimately did.

The best way to invest during bear markets is to put in a little bit every month. It's also the most emotionally easy way to invest anytime: You invest a fixed amount, say $1,000 from your paycheck, in the stock market every month regardless of how bleak the headlines are. The technique is known as dollar-cost averaging.

Now suppose you started your investment program on March 1, 2000, just weeks before the start of the bear market, and continued every month for 32 months until October 1, 2002, the month the bear market finally ended. By October 31, 2002, the $32,000 you invested would have shrunk to $24,451, according to Morningstar, a decline of 24%.

By contrast, if you had plowed the entire $32,000 into the stock market back on March 1, 2000, you would have been left with only $20,468 by October 31, 2002, losing 36%. (Note that the loss still isn't as big as the 44% decline peak-to-trough because the market hit its precise top and bottom in the middle of those months.)

Stocks rebounded sharply from their lows. For the entire 92-month stretch from March 1, 2000, through October 31, 2007, the Wilshire 5000 returned more than 30% on a cumulative basis (or 3.5% annualized), Morningstar reports. If you had plunked $92,000 into the Wilshire 5000 on March 1, 2000, it would have grown to $120,000.

Supposed you had invested $1,000 a month over the entire 92-month span? Your regular investments would have increased in value to a total of $136,020 -- a gain of 48% (6.5% annualized).

Investing a little every month doesn't work all the time, of course. If the market is in a long-term uptrend, it's best to have every dime invested as long as possible. But in bear markets -- and in volatile markets -- regular monthly investing works like magic.

What to expect in a bear. Living through a bear market is not fun. Since 1926, the average bear market -- typically defined as a drop of 20% or more -- has lasted 1.3 years. As measured by Standard & Poor's 500-stock index, stocks have plummeted an average of 33.5% during those bear markets, according to Jim Stack, president of InvesTech Research, in Whitefish, Mont. And that excludes the 86% decline from 1929 to 1932 that ushered in the Great Depression.

If you have the bad luck to invest precisely on the day of the market's peak, how long does it take to get even? On average, excluding 1929, it has taken 3.3 years after a bull market's peak to get your money back, Stack reports.

None of these returns includes dividends. Given that dividends account for a big part of stock market gains -- more in the past than currently -- the bear markets would be shorter and less painful were dividends included.

Since the 1930s, all but two bear markets have been significantly milder than the average -- with losses generally averaging between 20% and 30% or so and breakeven points of only two years or so.

The exceptions: 1973-74, when the S&P 500 fell 47% and took more than seven years to recover, and 2000-2002, when the S&P fell almost precisely the same amount and again took more than seven years to recover.

My sense is that these horrific bear markets, including the Great Depression, are once-in-a-generation events, and we've had ours for this generation. The exceptionally ugly bear markets start when markets are wildly overpriced -- not, as is the case now, when stocks are trading at reasonable prices in relation to corporate sales, earnings and assets.

But you should always be prepared for a bear market. And if you're planning on spending your money in the next year or two, none of it should be in stocks. But longer-term investors should relax and enjoy bear markets -- as much you can.

They really are good for you bottom line.

Shelby Cullom Davis, a renowned investor (and grandfather of Chris Davis, co-manager of the excellent Selected American Shares fund), put it best: "You make most of your money in a bear market. You just don't realize it at the time."

This page printed from: http://www.kiplinger.com/columns/value/archive/2007/va1204.htm
All contents © 2008 The Kiplinger Washington Editors

5 Ways To Survive A Recession

By Joseph Hearn - September 10, 2008 - AARP Bulletin Today

The U.S. economy is in a bit of a pickle. In no particular order, we’ve had a housing bubble, a credit bubble, a bear market in stocks, soaring energy costs, falling consumer spending, increasing unemployment, high food costs and burdensome debt levels.

The government has taken steps to maintain calm and stabilize the system—lowering interest rates, mailing $100 billion in stimulus checks, bailing out Bear Stearns, guaranteeing the debt of Fannie Mae and Freddie Mac, passing a $300 billion homeowner rescue package—but the problems have spread so rapidly that they threaten to pull the United States and possibly the rest of the world into recession.

To be sure, the economy is not yet officially in recession. It’s up to the National Bureau of Economic Research to make that call, and so far it hasn’t. Sometimes, however, we don’t need a doctor to tell us our arm is broken, especially if bone is poking through the skin. Consider the diagnosis of investor Warren Buffett: “By any common-sense definition, we are in a recession.”

So, we’re either in a recession or well on our way to one. Whatever the case, financial experts say there are ways you can protect yourself:

1. Don’t panic. Recessions have historically occurred every few years and they last, on average, about 10 months. No matter how bad it gets, the vast majority of people will still get up and go to work, pay their mortgage, and take a vacation now and then. The steepest recession in the last 30 years occurred in 1981. It lasted 16 months, the economy shrank 2.6 percent and unemployment reached 10.7 percent. More recent recessions have been less severe. The 2001 recession lasted only eight months, the economy shrank less than 1 percent and unemployment was barely over 6 percent.

“The last recession was over before it was officially announced,” says Ernie Goss, professor of economics at Creighton University in Omaha, Neb. “This one will likely be somewhat longer because of the sharp downturn in housing, but the economy will eventually recover.”

2. Repair your balance sheet. Many who took on heavy debt to purchase inflated assets like real estate are now in a position where they owe more than they own. According to a recent report by real estate website Zillow, nearly one-third of all homeowners who bought since 2003 now owe more on their mortgage than their homes are worth. For some, selling or refinancing may be an option.

Get rid of debt where possible and build up your cash reserves so you can ride out the storm. And put away the plastic. Credit cards in a downturn are like saltwater to a thirsty person lost at sea: It looks tempting, but it won’t help. Cut up all your cards except one for emergency use and then make a list of creditors to whom you owe money. Starting with the high-interest-rate credit cards first, pay off your purchases from years past before making any new ones.

3. Stop the bleeding. We all have leaks in our budget that can add up to serious money. Spending $10 a day at the vending machine or the mall is $3,650 per year. That same $3,650 would be a good start on a cash reserve or could be used to pay off high-interest credit cards. Miscellaneous expenses are the easiest to cut, but don’t be afraid to trim the fat in the rest of your budget as well.

4. Meet with your advisers. During the last bear market, many people learned the hard way that their investment portfolios were not properly allocated. Now is the time to ensure that your investments make sense based on your goals, time frame and risk tolerance. If you’re currently working with an adviser, these meetings are likely included in the fees or commissions you’re already paying. If you’ve handled your finances on your own and are just interested in receiving a second opinion, most firms are willing to provide consultations on a fee-only basis, usually ranging from $100 to $300 per hour.

5. Keep investing. When money is tight, it’s tempting to stop making IRA and 401(k) contributions. Because of the power of compounding, however, taking even a one-year break could put a serious dent in your nest egg—even more so if cutting back on your contribution means giving up your employer match. To illustrate, if you have 10 years to go until retirement and are contributing $250 per month to your 401(k), skipping just one year of contributions would shrink your nest egg by $6,000, assuming an 8 percent annual return.

Also, if you’re nervous about throwing money into a sinking market, consider the tip offered by health services coordinator Dorothy Ray of Omaha: “Investing into a volatile market has been scary, so rather than watching my account balance I’ve been watching my share balance. More shares will eventually translate into more money.”

Legendary investor Shelby Davis says it well: “You make most of your money during a bear market. You just don’t realize it at the time.”

Joseph Hearn is a financial planner in Omaha, Neb., and the coauthor of If Something Happens to Me.