HOT TOPIC September 2005
Coping with a Bear Market
The S&P 500 has declined a cumulative 38.6% from January 2000 to December 31, 2002. After a bull market in the 90’s where investors seldom witnessed a retreat in stock prices, the depth of this bear market has been trying for all. We have learned that risk is easy to accept on the upside but has much different ramifications on the down side.

Don’t Panic
So how do you cope with this precipitous decline? The first thing you should avoid is the emotional reaction to flee to safety. Intellectually, reason says the best thing to do when the market is down is to buy more. Few investors have the fortitude to do that. But the worst thing you can do is to make a knee-jerk reaction and sell at the bottom.

Review & Adjust
The first thing you should do is to review your investment plan. Why did you buy equities to begin with? Unless your objectives have changed, equities still offer growth opportunities and a hedge against inflation. If you are taking an income from an equity portfolio, you may need to adjust your level of withdrawals. And, if your asset allocation has changed dramatically, you may need to rebalance according to your investment plan. But, make certain any adjustments to your investments are based upon your objectives.

Focus On What You Know
The news media is full of concerns; the threat of war, accounting scandals and the poor economy. We hear news daily about unemployment, corporate earnings, politics and terrorism that is designed to alarm us. This “noise” can easily distract you and create fear of a difficult future.

Instead of concentrating on the rumor of the day, focus instead on what you know. For example, we know that interest rates are at a forty year low. We know that the stock market has risen dramatically following long bear markets. We know that our economic growth is the combination of consumer spending, government spending, business investment and foreign investment in the US. What are the prospects for each of these factors? When you assess these aspects, you can make clearer decisions to avoid making the wrong moves.

Making dramatic changes in your investments may indicate that you are reacting to your emotions. By staying calm and rational, you may better assess your needs for the future balancing the degree of risk and return that is right for your personal situation. Paying attention to the fundamentals will help you resist the urge to chase what worked last year and, instead, take advantage of what may come this year.

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