10 smart moves to beat a bear market

Jar filled with pennies

The markets are down. Way down.

There have been 10 bear markets since the 1930s, averaging about 16 months from peak to trough and pushing stock prices down an average of 31%.

This bear market is just 13 months old and it's already the third-worst, with losses exceeding 40%.

What should you do?

We asked some investment advisers how they're helping savers get through this bear market. Here's the best advice they have to offer:

Smart move 1. Keep your cool.

If you aren't planning to move or retire for several years, the value of your house or your retirement account today doesn't matter much, says Ann Logue, author of "Hedge Funds for Dummies" and "Day Trading for Dummies."

"If you have a disciplined strategy of putting a little money away every paycheck, stick with it," she advises. "Much of investing is mental, and those who can keep their heads and focus on their long-term strategy will be better off than those who sell now, at or near the bottom."

Smart move 2. Think long-term.

Successful investors maintain their focus on the long-term benefits of owning stocks and bonds and don't sell when the markets turn down, says Joseph Paul, president and CEO of Trident Advisors in Doylestown, Pa.

"Look at your portfolio in the same way that you look at your home," Paul says. "None of us were interested in selling our homes because the value declined. We held on because we remain confident that the housing downturn is temporary and that the benefits of homeownership for the long-term are unaffected by the short-term volatility we are seeing right now."

Those who speculated in real estate in search of short-term gains are the ones paying dearly, he adds.

Smart move 3. Maintain a balanced portfolio of high-quality equities as well as income-producing preferred stocks or bonds.

"Until the dust settles on the current financial crisis, preserving capital is far more important than chasing returns," Paul says.

He believes an ideal mix for this environment begins with 20% of the portfolio in cash equivalents, 35% in intermediate-term investment grade bonds or preferred stocks and 45% in large-cap equities, preferably in exchange-traded funds or index funds.

"As the credit markets improve, allocating the additional 20% from the cash account to the stock market will create the optimal 'normal market' portfolio for the long-term investor," he says.

Smart move 4. Turn off the TV.

Remember that you are an investor and not a trader, says Mike Flower, partner at Financial Principles LCC in Fairfield, N.J.

"Because you have long-term horizons, what the talking heads discuss in the short-term on TV will have little effect on your portfolio 20 years from now. With that in mind, if you invest systematically in your portfolio each month...a down market may be the best time to add to your accounts."

Smart move 5. Become a smarter investor.

Emotions cause savers to do the wrong thing at the wrong time, says Matthew Tuttle of Tuttle Wealth Management in Stamford, Conn.

"What has happened in the past few months is a game changer," Tuttle says. "Investors need to have a tactical methodology that allows them to move from areas that are not attractive to areas that are."

In Tuttle's opinion, this is best achieved through the use of computer technology that also back-tests ideas. (That means the program will see how well your strategy would have worked over the last several years.)

Smart move 6. Buy into solid companies that are being unfairly beaten down.

Always remember the fundamental strategy for building wealth: Buy low. Sell high.

So take advantage of this bear market to buy respected, profitable companies whose shares are off 20% to 40%.

"Three to five years from now, it will look like the deal of the century," says Jeff Wilson, president of Wilson Advisory Group LLC of Denver.

Smart move 7. Think small.

Small companies tend to lead us out of bear markets and recessions because they are more nimble, says Bob Laura, senior vice president of wealth management at First National Bank in Howell, Mich., and author of "Financial Karma."

They typically have more cost controls and leaner staffs, he explains. And they're oftentimes in niche industries and have a get-out-of-jail-free card that allows them to pass cost increases onto vendors and consumers.

"Small cap stocks are known for their volatility, which is why most portfolios only allocate 10 to 15% of funds to them -- mostly for diversification purposes," says Laura. "But the volatility also offers investors the quickest potential for rapid growth."

Smart move 8. Don't ignore consumer staples.

We all need laundry soap, aspirin and toilet paper, even in a recession.

"As discretionary income and credit availability shrink, so too does consumer spending," says Laura. People will focus on funding the necessities, not on buying a new iPhone or plasma television.

One concern to note with consumer staples: rising commodity prices. "The very things used to make and develop consumer staple products like Band-Aids, shampoo and toilet paper are seeing meaningful manufacturing cost increases," warns Laura.

Smart move 9. Pay down your mortgage.

Reducing debt is a form of savings.

The typical mortgage costs 4% to 6% a year, even after deducting the interest payments from your taxes.

With treasury bonds paying less than 4%, that kind of return "might be really hard to get anywhere in the market right now," Logue says.

Smart move 10. Buy certificates of deposit.

Many struggling banks are offering high interest rates on CDs in order to attract badly needed capital.

"They need deposits to offset the value of shaky loans," explains Logue. "As long as your deposit is less than the $250,000 FDIC insurance minimum, your risk is limited because the federal government guarantees your account."

Online and small local banks are also offering very competitive rates -- often 5% or more -- in an effort to win new customers.

Here's our best advice on where to find the best CD rates.

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