How To Survive the Bear Market At Any Age

It's scary, and it always is during a bear market because we cannot see the future.
We imagine losing everything. Some people flee during the worst of times -- locking in loses that might not be repaired for decades. Others simply freeze -- unable to figure out what to do. Most think that if they were just a little more savvy about the market they'd be able to examine the stock market and figure out what to do.
Forget such a notion. Even the pros can't see the future clearly.
What the pros do know is that eventually stocks recover. After the average bear market, the stock market surges 44 percent. So they try to position their clients to recover when the good times finally emerge. You can do this too, and it's not nearly as difficult as you might think.
Here's what to do:

Instead, respond to the following questions:
Do you have an emergency fund?
Money for an emergency should not be invested in the stock market. The rule of thumb is to invest no money in the stock market that you might need within about five years. Another rule of thumb: Always have three to six months' worth of cash in a high-yield savings account, money market fund or certificate of deposit, so you can get your hands on it quickly.
Do you have a child going to college soon?
If your child is in college or about to enter college, little of that money should be in stocks. You don't want your savings to disappear when the bursar's office is expecting a check. By the time your child is 13, consider dividing your money up half in stock and half in bond funds. At 16, you could follow the example used by T. Rowe Price in 529 college savings funds: Put only 34 percent into stocks, about 52 percent in bonds, and 14 percent in a money market fund. As your child begins college, have no more than 20 percent of your savings in stocks for the coming years. Are you saving for a house?If you expect to need a down payment within about five years, the money should be in money market funds, high-yield savings accounts and CDs. To find the best rates on savings accounts and CD's go to www.bankrate.com.
Are you retired? Conservative financial planners often keep only about 30 percent of a retiree's money in the stock market once they are in their 70s. Others might divide money up 50-50 in stocks and bonds. Some become more aggressive with stocks, but make sure retirees have five years' worth of living expenses in cash, CDs or short-term government bonds, so they don't have to sell stocks when it's a bad time to sell. For people on the verge of retirement, or just starting retirement, a common allocation is 60 percent in stock mutual funds and 40 percent bonds. A more conservative approach is 50:50 -- an approach that would be safer in a bear market. Cash -- or a money market fund -- can be a safer investment than a bond fund in times of inflation and rising interest rates. That's because bond funds drop in value when interest rates go up. Why? Bond funds are filled with bonds. When interest rates go up, people want to get as much interest as possible. So they like to buy new bonds with high interest rates. Old bonds -- or the ones already in a bond mutual fund -- drop in value because the old bonds have low interest rates that investors don't want. Think of it this way. Assume you have a bond fund filled with bonds paying 4 % interest. Now, new bonds come out paying 6 % interest. Why would investors want 4 %, when they can get 6 %. The bond fund will start buying the 6 % bonds, but meanwhile if they want to sell their 4 % bonds they will have to sell them at a loss. Investors worried about this can buy individual bonds or CDs and hold them until they mature. When you hold a bond, you don't lose money. Yet, realize that if a bond doesn't mature for many years, you could get stuck holding it -- and getting very little interest -- while inflation starts making your living costs go up. Interest rates rise with inflation, so if you think inflation is going to be a threat, don't lock all your money up in bonds that won't mature for several years.During nerve-wracking times when you are afraid of interest rates rising soon, you can park some money in a money market fund. You don't want to do this for a long time, however, because the 3 percent interest you might make isn't keeping you up with the cost of inflation.For more information for retirees, scroll down my blog to find "How Retirees Can Survive the Bear Market." It's under the category: "Survive the Bear Market."
Are you saving for retirement?
If you are many years from retirement, you will recover from this downturn in time. Cycles are painful, but are a natural part of investing. It has been rare for the stock market to remain down for more than five years, according to research by Ibbotson Associates. It has never been down for 15 years. So if you are years away from retiring, you are likely to enjoy the surge that eventually comes after every bear market. On average, after the bear market hits bottom, it surges 44 percent in a single year. Sometimes it's been more and sometimes less. Also, on average investors -- who keep their money in the stock market -- earn back what they lost in 2 1/2 years. When you see "stock market," realize I am talking about the full Standard & Poor's 500, or what you would get in the typical stock market "index fund" in a 401(k) plan. If you are picking individual stocks you are taking a bigger chance.
If you are a nervous investor you can try a portfolio that is 60 percent in stocks and 40 percent in bonds. You can often find such a mixture in a type of mutual fund called a "balanced fund."
Can you make your money safer?
When you combine stocks, bonds and cash (money market funds), you give your money a chance to recover from bear markets, and you insulate it somewhat during the worst periods. Think of bonds and cash as shock absorbers. Financial planners often suggest that people in their 30s and 40s select a 70-30 stocks-to-bonds combination. As people age, they should remove some money from stocks and put it in bonds. So by the time a person is in their 60s, they will have about 60 percent in stock funds and 40 percent in bond funds. If they are a cautious person, worried about the stock market, a 50-50 combination would be better.
Are you using a moderate approach?
Here's how you might divide your money in a moderate portfolio of mutual funds if you can convince yourself to stick with stocks for the long term, but are afraid to be too exposed to the stock market now: 40 percent in bonds, 39 percent in large-cap stock funds which invest in large companies, 6 percent in mid-cap stock funds which invest in medium size companies, 6 percent in small-cap stock funds, which invest in small companies, 9 percent international stock funds. This type of mixture is called "being diversified." If you are in a diversified portfolio and are scared, consider ratcheting back stocks by 5 percent or 10 percent, rather than fleeing altogether.
Can you start buying?
If you are saving for retirement and have a diversified portfolio, keep putting money into it. If the downturn in the stock market is too much for your to stomach, keep saving as much money as usual, but put it temporarily into a money market fund or stable value fund in a 401(k) or other retirement savings plan.
If you can force yourself to use a portfolio like I described above, you will be buying stocks at a price about 20 percent below where they were in early October. Think of it as shopping the sale rack. In a bear market there can always be more markdowns, but at least you know the price you pay today is a better deal than the price you paid while feeling safer in early 2007.

How Stocks and the Stock Market Work

The stock market appears in the news every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."
Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, then this article will open your eyes to a whole new world!
Determining ValueLet's say that you want to start a business, and you decide to open a restaurant. You go out and buy a building, buy all the kitchen equipment, tables and chairs that you need, buy your supplies and hire your cooks, servers, etc. You advertise and open your doors.
Let's say that:
You spend $500,000 buying the building and the equipment.
In the first year, you spend $250,000 on supplies, food and the payroll for your employees.
At the end of your first year, you add up all of the money you have received from customers and find that your total income is $300,000. Since you have made $300,000 and paid out the $250,000 for expenses, your net profit is:
$300,000 (income) - $250,000 (expense) = $50,000 (profit)
At the end of the second year, you bring in $325,000 and your expenses remain the same, for a net profit of $75,000. At this point, you decide that you want to sell the business. What is it worth?
One way to look at it is to say that the business is "worth" $500,000. If you close the restaurant, you can sell the building, the equipment and everything else and get $500,000. This is a simplification, of course -- the building probably went up in value, and the equipment went down because it is now used. Let's just say that things balance out to $500,000. This is the asset value, or book value, of the business -- the value of all of the business's assets if you sold them outright today.
But what if you keep it going? Read on to find out.