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Bear-ing up to the market

Posted: October 20, 2008 8:33 p.m.
Updated: December 22, 2008 5:00 a.m.

Is the current bear market different from past bear markets? Take a close look at what investment professionals have discovered about this bear market, how it compares with previous ones and what lessons we can learn.

What is a bear market?

A bear market is defined as a decline of 20 percent or more from a market high. When a downturn begins, it initially affects one part of the market, and gradually, the losses spread widely to related industries and then even to strong companies. The most recent example prior to the current bear market was the Internet-inspired bubble which began in 2000 and ended in 2002. We all know what caused the current bear market, subprime mortgages caused by lax regulations of mortgage brokers, housing speculation, and exotic investments based on the securitization of mortgages.

How long do bear markets last?

We still don't know how long this bear market will last. A look at history shows that the Dow Jones Industrial Average has come back after bear markets, but investors had to suffer the pain to stay the course. After the 1929 crash, it took investors 16 years to restore their investments if they invested at the market high. In 2000, it took about five years. But after the 1990 crash, it only took about eight months.

What to do?

A few good rules to follow that market declines have taught us are:

n Don't try to jump in and out of the market. Successful market timing during a bear market is extremely difficult because it requires getting out at the right time and getting back in at the right time.

n Stay calm and meet with your financial adviser. It could be helpful during a bear market to take another look at your investment goals, time horizon, risk tolerance, and financial circumstances.

n Maintain a diversified investment portfolio. In any type of market, you can spread your risks by selecting a mix of mutual finds that invest in stocks, bonds, and money market instruments.

Include funds that invest outside the U.S. Markets around the world have been interrelated, but various countries still tend to move in different cycles than the U.S. market.

n Invest regularly every month. Regular investing, also known as dollar cost averaging encourages discipline and is an important strategy for taking the emotion out of investing. This way you buy more shares when the market is down, and over time this has proven a good disciplined approach to investing.

You must have a willingness to keep investing when share prices are declining.

As always, these are rules and decisions that you should discuss with your financial advisor to determine the best course of action for your circumstances and goals.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, Inc., located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.


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