Grin and bear it.

ONE FOR THE MONEY

Investment strategies for surviving a grizzly market

Goldilocks may have had a tough time with her three-bears-blues, but her problem was a picnic compared to the plight of investors in today's distressed stock market. Recent meltdowns, better known as the "bear market," have caused investors to reassess investment strategies after savoring the spoils of a lucrative bull market.

It is important to understand the difference between several days of dips on the Dow Jones industrial average and an actual bear market. What exactly constitutes a bear market? The general definition of a bear market is a decline of more than 20% in a major stock index. Traditionally, the S&P 500 stock index is used as the benchmark. The recent importance of the Nasdaq composite index has caused some pundits to consider it as a measure for determining a bear market. Either way, both schools of thought agree the dreaded bear is done hibernating.

According to the Ned Davis Research Group in Venice, Florida, during a bear market, stocks plummet for an average of 12.1 months. Furthermore, investors have t9 hang on for 32.1 months before their portfolios recover. So what's an investor to do? First, recommit to asset diversification. The last decade seduced investors into being fully invested in equities. Now, it's time to get back to the basics and craft a defensive portfolio. "The defense in a bear market is to build a diverse portfolio of value and growth mutual funds, individual stocks, and bonds, and to keep your cash in a high-yield money market," explains Richmond Heights, California-based financial advisor Joyce Muse-Harris.

"No one knows when the market will rebound, but history has shown that it always does," says Muse-Harris. That idea was reinforced by a survey of portfolio strategists in The Wall Street Journal that showed experts recommend investors have a portfolio with 61% in equities, 31% in bonds, and 6% in cash. However, such wise advice is hard to follow "thanks to the exciting bull market of the 1990s," says author Sy Harding in his book Biding the Bear: How to Prosper in the Coming Bear Market (Adams Media Corp., $12.95). "There are now 40 million investors in the United States, and they have far and away more money and a higher percentage of their net worth at risk in the market than ever before. Unfortunately, 85% of that money flowed into the market in just the last five years. [Many] have never experienced a bear market or anything like a bear market."

During this trying time, a bear-market rule of thumb is to keep buying solid companies at depressed prices. Then, when a bull market arises, soaring share prices will be your reward. Another rule: Don't sell stocks in a panic. "Many people are into emotional investing and it has taken its toll on the market," declares Muse-Harris. Obviously, if you are holding losers that you believe will never recover, sell them, and use the cash to buy good vehicles at these fire sale prices. Lastly, be sure to indulge in guaranteed moneymakers such as certificates of deposit (CDs), which yield as much as 5.84%, and keep cash in money market accounts that offer at least 6%, if possible.

If you still need help keeping calm, visit some top-rated Websites that investors tap for research, picks, guidance, and basic information. One site, www.companysleuth.com, sends daily e-mails to members updating the status of specific stock picks. For a great place to park your cash and look for top rates on CDs and money market accounts, go to www.bankrate .com. And www.financialengines.com, the brainchild of Nobel Prize-winning economist William F. Sharpe, provides objective investment counsel on the market during inevitable ups and downs.

In the end, whether slugging it out with a bear or running with a bull, smart investors will survive a bear market in much better shape if they do some practical planning, diversify assets, be patient, and follow the golden rule: buy low, sell high, and dollar-cost average. "A bear market definitely offers great value since many company share prices are depressed" says Muse-Harris.

Bear Tracking

A lookat past bear markets, and how long it took investors to recover.

Months of the bear       Drop in    Months to   Months to
                         S&P 500    decline     recover
                         Index

Dec. '61-June '62         -28.0%      6.5        21.0
Feb. '66-Oct. '66         -22.2       7.9        15.0
Nov. '68-May '70          -36.1      17.9        39.8
Jan. '73-Oct. '74         -48.2      20.7        91.5
Sept.'76-Mar. '78         -19.4      17.2        35.3
Nov. '80-Aug. '82         -27.1      20.5        23.5
Aug. '87-Dec. '87         -33.5       3.2        23.4
July '90-Oct. '90         -19.9       2.8         7.1

Average                  -29.3%      12.1        32.1

Source: Ned Davis Research, Venice, California, 2000