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How Do You Survive a Bear Market?

The answer for most small investors: very carefully

By Fred Yager
ConsumerAffairs.com

July 1, 2008

Maybe so, but even Jim admitted this week that bull markets aren’t always easy to find when most of the world’s markets have entered bear territory, which means they’ve lost at least 20% of their value from their latest peak.

Technically, the U.S. market is down only 19% but you can almost hear the bear smacking its lips and as the saying goes, “Some days you eat the bear and some days the bear eats you.”

If history is any indication, any new bear market would probably go down at least another ten to 12 percent before it begins to come back. The good news is that bear markets usually don’t last as long as bull markets and when they begin to recover, they tend to come back quickly, often within 12 months.

But if you’re an investor trying to put some money away for retirement or your children’s college fund, what do you do now?

There are some who recommend not doing anything. Put your money in a bank savings account and wait until things get better. You could do that, but what if you need to grow your portfolio more than one or two percent?

UBS Wealth Management Research just put out a report that urges their clients to take a defensive stance in equities by looking at large cap international companies such as Coca Cola, Proctor and Gamble and United Technologies.

Even Jim Cramer likes Coke and Proctor and Gamble. On the fixed income or bond side, UBS prefers high rated corporate bonds over governments, and they recommend two year bonds over five year.

Back to Cramer. He recommends investing in two of the reasons we’re in a bear market to begin with -- oil and gas.

He also figured out a way you can capitalize on the new Medicare bill but you need to know where to look. Plus the bill still has to pass Congress. Cramer says that Medicare services companies such as dialysis providers should do well because new rules in the bill would increase the annual base rate for dialysis which would be a huge boost to their earnings.

As for an oil play, OPEC President Chakib Khelil predicts oil prices could reach as high as $170 a barrel this summer so there may be some strength left in that industry. Just don’t get caught when the oil bubble bursts -- and many believe it will by year’s end.

Short it

Some strategists say the best play in a bear market is to go short, which means you would benefit from further drops. One way to do that with minimal risk is to invest in ProShares Exchange Traded Funds (ETFs) that short the major indexes – the Dow, S&P 500 and Nasdaq. If the indexes lose, you win. But if they go up, you lose.

In any event, if you've got the stomach for it, bad times can be a good time to invest.

Prices on many equities are now at all-time lows. Just be careful about what Cramer refers to as the “Bond Bullies.” Those are stocks of companies that are carrying a lot of debt, such as General Motors and Ford. They may be vulnerable to their creditors, who get paid before common stockholders.

For those investors whose tolerance for risk is non-existent, which precludes tracking the bear, the safest move is to shop around for a decent bank CD. Some are paying over 4 percent, which isn’t a lot, but at least it’s moving in the right direction, up instead of down. And it's insured, so while you may not make much money, you can be certain you won't lose any.

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