Two Questions I Ask During a Bear Market

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

This bear market has lasted quite awhile. Next month the bear market will be one year old. Based on the current situation in the financial markets, I believe the stock market malaise will easily last another year until October, 2009. At this point, I plan to maintain my current stock holdings and not add any new money. The only exception is that I plan to sell some of the company stock in my retirement account during any bear market rallies.

Here two questions I answered to determine my current planned actions.

Can I sleep well at night? While my accounts are down, the value decline is primary due to the stock market being down, versus individual stock issues that I own. Since I do have confidence in a US and global economic recovery, I expect that my diversified equity accounts will recover with time. As expected, the CD and bond elements of our portfolio have small positive returns.

However, this bear market helped me realize the risk of having 45% of our financial assets in my company stock. In June, 2008, my company stock had fallen almost 20% YTD, which was about 5% lower than diversified stock indices. The stock has since recovered and I am actively selling shares using a covered call strategy.

Answer: Yes, for diversified stock holdings, bonds, and CDs. No, for company stock.

Should I change my investment strategy? In a bull market, almost every investment strategy, even the poor ones, seem to make money. However, during bear markets, poor investment strategies seem to lose the most money. For example, a buy on dips strategy for tech stocks worked very well for me in the late 90s, but in 2002 such a strategy only resulted in significant losses.

At this point, I am comfortable with the allocation and investment strategies in the managed accounts and my stock selection system. Although both are currently down, I believe the stocks in both will recover as the market recovers. Thus, I continue to maintain the funds in these portfolios.

The only refinement to the strategy is that I am not investing any new money into these accounts. The funds generated from selling my company stock will remain in cash for the short term.

Answer: No major change, just a small refinement.

These answers are based on my belief that Treasury and Congress can come to an agreement for a plan to increase liquidity and stabilize the markets. The answers to these questions might change if the economic or financial market situations worsen.

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This is not financial advice. Please consult a professional advisor.

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