It’s Never Too Late to Confront the Bear

Is there a bear market strategy for the average investor?

The “strategy” people have heard from virtually every financial planner for the last decade has been to ignore market declines. Just stay invested, don’t try to time stocks’ swings, don’t sell because when you do it will invariably be at the market’s bottom and you’ll never get back into stocks in time for the rebound, etc. etc.

That has been the classic line, and it served most people well through 1999.

But right about now many investors are questioning that advice and every other bit of purported wisdom they’ve heard about giving stocks the benefit of the doubt no matter what.

Last week, the blue-chip Standard & Poor’s 500 index slumped to its lowest level in nearly three years, breaking through the lows reached in April and thereby officially extending the bear market that began in spring 2000.

The idea of “never selling” has cost some people a lot of money, especially older investors who thought the paper gains they racked up in the 1990s were going to make for a very happy, and even early, retirement.

Let’s take computer networking giant Cisco Systems, a favorite of small investors and institutional investors alike, as an example.

The stock peaked at $80 on March 27, 2000. By the end of May 2000 it was at $57, down 29% from its peak. But investors were roundly advised to hold on--this was Cisco, after all, a company critical to the buildup of the Internet’s global infrastructure.

By the end of December 2000 the share price had fallen to $38.25, a decline of 52% from the peak. Surely, it was too late to sell, the stock’s fans argued.

But the price continued to slide, reaching a closing low of $13.63 on April 6. Then the long-awaited rebound began, pushing Cisco to $23.48 by May 22. Many longtime owners of the stock, however, were understandably reluctant to sell at that point. They expected the rebound to continue.

Instead, Cisco is back to $14.36 on Nasdaq, an 82% drop from its 2000 peak.

Even if the stock doesn’t go any lower, how long will it take for the price to get back to the $30 or $40 range? Six months? Two years? Ten years? Ever? At this point, any investor’s guess is as good as the guesses of the highly compensated Wall Street analysts who follow the stock. They didn’t expect it to get to these levels. So their continued optimism about the stock is more than a little suspect.

You can’t go back and make the trades you wish you had made. But you have control over whatever is in your portfolio at the moment.

This bear market is old by historic standards. It has gone on for about 18 months as measured by the S&P; 500’s slide, versus an average duration of 10 months for major market declines between 1957 and 1990.

So adopting a bear-market strategy today might seem a worthless exercise. History says the market should be close to the end of its bear run. But we’ve all heard that line many times in the last 18 months.

Even if it’s over or nearly over, there is the issue of what kind of rebound the market can muster in the next few years and in the longer term. Your strategy in the market can’t just depend on whether you think the bear market has ended. You have to factor in your expectations for the future. And someone with a 10-year time horizon may have to look at stocks very differently than someone with a 40-year time horizon.

At this stage of the bear market, knowing that veteran investors already have lost a lot on paper, what kind of strategy makes sense?

Consider which of these statements might best describe your attitude toward stocks today:

* “I can’t stomach any more losses in my stock portfolio.” If that’s your view, first answer this question: Are the losses just too much to bear emotionally, or because you have (or had) plans for that money in the near future?

If you really need whatever’s left of your stock capital for some major expense in the next year, such as a retirement home or a child’s college costs, then the argument that “it’s too late to sell” doesn’t apply to you. It’s never too late to sell if the risk is that critically needed capital will decline an additional 20%, 30% or . . . pick a number.

Moving that money--or at least a portion of it--into something that is unlikely to lose value, such as a bank account or a money market fund, may make the most sense for you now.

If your problem with losses is purely emotional, meaning the money won’t be needed soon but you hate seeing it dwindle, selling some portion of your stocks might help you sleep better. But along those lines, one of the statements listed below might better describe your true attitude toward the market and the best step for you.

Just remember that being completely out of the market is itself a high-risk strategy--the risk being that you will miss the rebound, whenever it comes.

* “I can hang on, but I’ve learned my lesson about stocks.” If you find yourself talking this way, you probably have been mulling a significant shift in your portfolio--perhaps skewing your assets more toward capital preservation than capital appreciation.

Unless you need the money soon, however, you probably can afford to make changes gradually. For example, if the magnitude of stocks’ losses has convinced you that you want to take less risk overall with your money, then you should have a plan for shifting more money from stocks to bonds or to short-term accounts over time.

If you save money via an employer-sponsored savings plan, such as a 401(k) retirement program, it may be simple enough to alter your portfolio mix. You can shift some of your existing assets, or you can change the mix of investments you’re buying with your regular contributions. Or both.

Wherever you hold your stocks, here’s the key argument for selling gradually if you want to change your asset mix for the long term: If the stock market is indeed poised for some kind of rebound in the next year, you’ll be able to sell into any rally, reaping better prices than you can get today.

What’s more, if it’s bonds you want to own (or own more of), yields today are very paltry--in part because so many investors already have fled to bonds from stocks. The annualized yield on a five-year U.S. Treasury note is a mere 4.31% now. It was 5.85% a year ago.

If the stock market rebounds in the next 12 months, it almost certainly will be because the economy is rebounding. And if that’s the case, interest rates most likely will move higher. In that environment, periodically shifting some of your assets from stocks to bonds will get you better share prices on the sales and higher yields on your bond purchases, until you get your asset mix to where you want it.

* “I want to own stocks or stock mutual funds--just not the ones I own now.” If this is your main problem with equities, you must believe you’ve made some bad choices, or your financial advisor did. Or perhaps you made good choices that have gone particularly bad, and you’ve stayed too long.

If the stocks or funds you want to sell are held outside retirement accounts, any losses you record can be used to offset any realized capital gains you have this year, providing a tax advantage. That can be a substantial plus.

Meanwhile, with most stocks and stock funds down this year, you’re getting an opportunity to buy better ideas at cheaper prices. That is the only good thing one can say about a bear market, but it’s a very big good thing.

Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.