Survive The Bear Market: 10 Steps To Ride The Downturn

Photo: Bruce Turner

The stock market has experienced an unbelievable slump from a high of around 14,000 in the Dow Jones index sometime in 2007 all the way down to 8,000 last I checked.  And fundamentally, the economy hasn't changed very much to merit any improvements in the investment landscape anytime soon.  So as an investor, it's easy to fret over our portfolios especially when we hear a lot of investment "experts" declaring the "death" of the buy and hold strategy.  Is it time to start listening to the critics of long term investing who are just now crawling out of the woodwork?

I'm far from giving up on long term investing just yet.  Instead, I'm looking at productive actions we can take to leverage this downturn in the market. As the saying goes, every crisis breeds opportunity, and this is one heck of a crisis if I've ever seen one.  Here are a few things we all can do to get ourselves prepared for the next leg of this market, as we wait for the economy to recover:

The Best Ways To Ride A Bear Market

1. Take stock of your financial institution.
How has your bank or stock broker served you?  During this economy, a lot of financial institutions have folded, while a lot more have risen to the occasion. I think the time is ripe to assess if our money remains in good hands given how these tough times have tested the financial industry. Consumer Reports recently shared their report on how well low cost stock brokers have performed during the recession, having bested their full service brethren (I've written reviews on TradeKing and ETrade that show how well discount brokers are functioning these days). It's also a good time to assess if your bank or credit union is on solid footing.  Is your money truly safe where it is?

2. Increase your savings.
I'm focusing on increasing my savings these days. Ever since my portfolio has plummeted in value, I've doubled my efforts to save and to build my cash position.  Liquid funds will come in handy during a time of market upheaval, when you'll find a lot of opportunities for your money.  Your liquid savings can earn a reasonable interest rate in a reputable online savings account  (here are some reviews on HSBC Direct and Dollar Savings Direct).  I particularly like those institutions that allow for quick access to my money through electronic transfers.  Keep your powder dry and use it well!

3. Rebalance your investment portfolio.
My portfolio has gone off kilter along with worldwide stock indexes. With my stock allocation diminishing by 10% to 15% of its original value, I'm scheduled to move the funds I have in my high interest savings accounts into my battered index funds just to be able to restore the balance in my investments.  By making such a move, I'm automatically buying into a discounted asset class at far cheaper prices.  I'm committed to staying the course.

4. Beef up your investment education.
This is the third recession or downturn I've experienced in my lifetime, and each time, I've found myself learning just a bit more about economic and market cycles. Over time, I've learned to become a more patient investor -- this kind of crazy market affords a great learning opportunity for us.  This is the kind of market that has inspired me to broaden my investment knowledge, prompting me to study technical analysis and to learn the use of interesting stock charting tools.  I'm hoping to gain a better perspective on the market's behavior this way.

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5. Reevaluate your investment strategy.
Many of us long term investors are being sorely tested by the current market environment.  Is now the time to abandon your financial and investment plan? It depends!  Has this challenging market poked holes into your strategies?  You may have found out the hard way that your plan has certain limitations, and if so, I'd suggest giving it a hard second look to see where you can patch up the gaps. In my case, I discovered that my stomach for risk isn't as strong as I thought it was, and have opted to become just a wee bit more conservative about my investments.  If you're a senior citizen, a 100% stock portfolio is hard to justify at this time.  But if you're young and can handle the volatility, you may want to readjust your asset allocation to increase your equity holdings.  Some people will argue that now is not the time to make dramatic adjustments to your plan -- and I agree for the most part: if you're going to make changes, do so for strategic reasons (and not for emotional reasons). I'm only suggesting that you use this opportunity to fine-tune the plan and portfolio you already have based on the things you've learned and realized during this downturn.

6. Dump your losers.
How about cleaning the clutter from your portfolio now? By getting rid of losers, you'll receive a tax write off while simplifying your portfolio at the same time.  If you want to keep your stocks, you can still take a loss for tax purposes by selling your position then buying it back later, but beware of the wash sale rule when you execute such a move. 

7. Convert to a Roth IRA.
If you've got a retirement portfolio that's suffered a loss, you may want to evaluate ways to leverage this loss.  Again, there may be tax benefits for making changes to your portfolio at this time. For example, if your traditional IRA has gone down in value, you'll get taxed less by converting it to a Roth IRA, provided that you qualify for the conversion.

8. Buy low.
This seems pretty obvious -- buy low should be the mantra of every investor around. The question is, should we wait for a retest of the stock market bottom?  Or is it time to jump in with both feet?  A lump sum investment usually does best over time during a rising market, but I prefer taking the dollar cost averaging approach for peace of mind and for spreading the risk over time.

9. Cut down on your expenses.
The recession has taken a big chunk out of the income and earnings of many families, including my own! But one thing it's also done is to change our views on spending and saving.  My family has successfully cut expenses by 30% since the financial crisis hit, and has also become more resourceful about how we manage our money and earn income.

10. Don't obsess.
Finally, this is one time we shouldn't dwell upon or obsess over the plight of our portfolios. That would be a waste of time and mental energy! Instead, take action and formulate a working financial plan if you don't have one already, or tweak the one you already have to better fit the current market environment. I've certainly worked on positioning myself for better days ahead.  By preparing and adjusting our investments right now, we can really put ourselves at a great advantage once the economy and the markets start turning around.

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Guest's picture

Solid advice!

I would add: look for opportunity while others panic . . .

Guest's picture

This is a great article with valuable tips! This is exactly the kind of information people need to be aware of and follow at the same time during the economic meltdown we all are in.

Guest's picture
Imee

This is a really good article, I must say. I don't normally say that unless I really think the advice being given is legit and actually useful. I hope more businessmen stumble onto this and learn how to survive the recession.

Guest's picture

and very comprehensive.

I'm definitely going to make sure I get the best online account available.

Guest's picture

This is very useful and valuable information to share especially in the current economic situation. It will definitely help individuals get right advice in taking the necessary steps to cope up and live comfortably.