Bear Markets Suck, But Don't Give In to the Pain

Last Updated Apr 3, 2009 8:20 PM EDT

Watching our nest eggs shrink amid the market plunge absolutely stinks, no two ways about it. But don't give in to your natural impulse to sell out.

I'd be lying if I said the bear market didn't hurt. I have my grumpy, complaining, "I can't take it anymore" moments, just like everyone else. The anxious questions swirl around our heads: What if capitalism really is dead and the market has much further to fall? Do we really have a new paradigm? Don't we need to protect ourselves from this possibility?

My instincts tell me that there's only one way to make the pain stop -- sell the remaining half of my family's stock holdings and get out now. At the very least, that would spare me from associating the dismal market with the collapse of our savings.

So why don't I get out? Stubbornness, perhaps, but there's also a logical method to the madness. New paradigms are all too common -- just look at the following chart. The first three turned out to be pretty foolish, and I'm betting that the current one will too.

"This time it's different" has a lousy track record
Year New Paradigm
1999 Bull It's a new age economy and cash flow doesn't matter. Stocks will go up forever.
2002 Bear The economy is in trouble. Stocks, having lost half their value, will continue to fall.
2007 Bull There is no problem lending money to people who can't pay it back because real estate values will always go up. The Dow will soon be at 40,000.
2009 Bear Capitalism is dead. Get out of the market now!
This isn't the first time I've felt this pain, and I'm sure it won't be the last. And even though this is one of the most agonizing stretches in my lifetime, giving in to despair would be a huge mistake. Of course, I'm not guaranteeing that the market will go up next year or even in the next ten years. But it makes sense to go with the odds and what has worked well historically.

My advice
It's possible that "this time, it really is different." It's also possible that I'll win the lottery or catch Angelina Jolie on the rebound. All I can say is that whenever I've heard about a new paradigm, reacting to it has almost always been the wrong thing to do.

Unless you have a huge portfolio relative to your life expectancy and expenditure rate, leaving it all in Treasury bonds practically guarantees it will get eaten by inflation and taxes. You may feel better in the short term, but you'd be selling your long-term goals short.

If you have the stomach to withstand possible future losses, and can wait ten years or more before touching the money, consider staying the course with a well diversified, ultra-low-cost global stock index portfolio combined with a shock absorber of high quality bond funds and U.S. government-backed CDs. Then, in the "do as I say and not as I do" category, try to avoid looking at the market or your portfolio value.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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