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Rules for coping with down markets

- Alan Lavine and Gail Liberman

Does all the current news about the credit crunch make you worry about your mutual funds?

Fortunately, there's a history with stocks that can give you an idea of how bad things can get.

In the past 30 years, when the stock market lost at least 15 percent, it took about two years to recover those losses. That's happened five times since the 1960s, according to Ibbotson Associates, Chicago.

The average bull market has lasted three years.

Over the past 50 years, a 100 percent investment in stock mutual funds grew at an average annual rate of 11.7 percent. Not bad! But you had to accept losses along the way. The average loss was -9.4 percent. The worst one-year loss: -26.5 percent.

Since 1946, there have been 10 bear markets when stocks have dropped at least -20 percent, according to Standard & Poor's. During a bear market, stocks typically lost about one-third of their value over 15 months. After that, it took two years, on average, to break even on those losses.

A correction occurs when stocks lose 10 percent. There have been 87 corrections since 1928. Corrections average about eight months. On average, it takes about four months to break even on those losses.

Here are some golden rules to follow if this economy is giving you the jitters.

  • If you can't sleep at night due to investments, make changes! The majority of those who sell when the market tumbles have invested over their heads. Jane King, a Wellesley, Mass.-based financial planner, says worried investors might consider a balanced fund that invests similar amounts in both stocks and bonds.

  • Don't panic. Experienced investors invest regularly through thick and thin. Over the long term, this strategy pays off.

  • Reduce the risk of your overall holdings. Take profits from stocks or stock mutual funds and invest in bonds, cash, real estate and other investments. Every year, keep the same percentage mix that fits with your investment comfort level. Diversify within those categories.

  • The older you are, the less risk you should take. On the other hand, those who recently have retired may live into their 90s, and also need their money to hold out. Experts say a 30 percent investment in a diversified mix of stocks is a good compromise for retirees.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

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