Riding out a bear market: Six tips for staying upbeat during the market downturn

As the global economy reels under the weight of the current financial crisis, many of us find ourselves shouldering our own burden of economic uncertainty. We are being bombarded by fearful predictions from investment experts and sometimes-conflicting advice from family and friends. Americans are all asking the same question: What do I do now?

During times of economic turmoil, it’s natural to feel uneasy about your financial future. But beware of taking action as a result of your nervousness without giving thought to your overall strategy. If you act out of fear, you may miss out on some of the best opportunities to pursue your long-term financial goals. Before you take any dramatic action, consider these six tips for riding out a bear market.

* Leave long-term investments alone. At times like these, it’s tempting to move your money out of the market and into so-called “safe” investments. But the truth is that over the long run common stocks have outperformed bonds and other debt investments. From Dec. 31, 1925, to Dec. 31, 2007, large-cap U.S. stocks as measured by the S&P 500 index grew at an average rate of 10.36 percent per year compared to annual inflation of 3.05 percent for the same period.

It pays to be disciplined and wait for a market rebound. Historically, after the market goes down it has eventually recovered and gone on to reach new highs. Often the initial period of recovery is as steep as the worst part of the decline. Consider these notable short-term declines of the S&P 500 in recent history, along with the immediate recovery periods that followed:

Date Began Percentage Decline Date Ended Subsequent 1-year return

January 1973 48.2% October 1974 38.0%

August 1987 33.5% December 1987 22.4%

January 2002 32.0% July 2002 17.9%

Of course, past performance is no guarantee of future results.

* Don’t try to time the market. We’ve all heard that the secret to making money in the market is to buy low and sell high. Unfortunately, what people tend to do after a market drop is decide they can’t take it anymore �“ so they move from equities to cash.

A common thread among investors is that they only want to be out of the market “right now while it is bad,” or “until it stops going down.” The challenge with that approach is that the odds of successfully timing the markets are quite low. An effective round trip requires being right twice �“ at the point of exit and the point of re-entry. The cost of getting it wrong�”of being off by just a few days�”can be very high. For example, if you had stayed invested in the S&P 500 during the ten-year period ending Dec. 31, 2007, you would have experienced an average annual total return of 5.8 percent. But if you pulled out of the market for just a few of the best days during that decade-long period, you would have fared far worse:

Invested Average Annual Investor Return (S&P 500)

Fully 5.8%

Out 10 Best days 1.02%

Out 20 best days -2.64%

* Invest on a regular basis. Continue to contribute to your long-term goals in a well-conceived savings and investment plan. A down market can be a great time to add to your investments by “buying low.” As others flee the market, buying opportunities are created for those with long-term horizons.

One way to avoid worrying about the specific timing of your purchases is to dollar cost average by investing a fixed sum of money periodically �“ every week, month or quarter. When stock prices are high, you purchase fewer shares at those levels. When prices are low, you buy more shares at relatively attractive prices.

* Keep saving. In uncertain economic times, it is important to maintain emergency savings equal to three to six months of living expenses. Saving will not only help prepare you to deal with financial problems in the future, but will also make you feel better now. The process of saving drives feelings of financial security. The more you save, the more optimistic you feel. And the more consistently you save, the less financially stretched you’ll feel.

* Reduce short-term debt. We’ve been hearing a lot about the role that sub-prime mortgage debt has played in the current financial crisis. But rather than point fingers at the financial industry we all need to take a close look at our own debt levels. Make it a priority to reduce personal debt in the near term and eliminate it in the long term. Reducing short-term debt can create breathing room in your budget and increase feelings of financial security.

* Follow a plan. During periods of market volatility you should strive to continue to follow a long-term financial plan. Your plan should address cash flow, savings and debts. It should cover various areas of risk management, and it should include a wealth management strategy that is aligned with your goals and risk tolerance. Your plan should also address your values and what is important to you. Having your plan aligned with your personal values can help you stay the course during difficult times.

Past performance is no guarantee of future results. Risk is an inherent part of investing. You should consider your risk tolerance when evaluating your investment options. Investment return and principal values will fluctuate over time so that your investment, when redeemed, may be worth more or less than its original cost. Information about risk, charges, objectives, expenses and other important considerations will be contained in the offering documents, including the prospectus, for the investment you are considering. You should carefully review these offering documents before investing. Offering documents may be obtained from your financial advisor. The S&P 500 Index is an unmanaged index considered representative of the U. S. stock market. Performance reflects reinvestment of dividends. An investment cannot be made directly in an index. Dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since dollar cost averaging involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low price levels.

Ken Jones is a Financial Advisor at First Command Financial Services in Havelock, N.C. This article was written by First Command, and it is intended to promote the professional services of the company.

© 2008 First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. (Member SIPC, FINRA).