Published June 2003

Bear market has important lessons to teach

You might think there’s nothing positive in a stock market that has slumped for the last three years straight. After all, the value of your holdings is down, and you’re having a hard time seeing where to invest. And yet, in spite of it all, a long bear market can teach investors some important lessons.

Here are a few to consider:

n Stay in the market. When prices keep falling, many people try to “trade their way to success’’ (or they get out of the market altogether). However, constant stock trading is expensive and usually ineffective. Furthermore, it’s hard to develop a solid, disciplined investment strategy if you’re always making trades based on short-term considerations. And if you jump out of the market, you could miss the early stages of a recovery. It’s generally a good idea to stay invested rather than try to time the short-term ups and downs of the market.

n Know your own risk tolerance. We all have different investment personalities. Some of us are willing to take more risk in exchange for potentially higher returns. Others accept lower returns in exchange for greater stability of principal. Most investors are somewhere in-between. Bear markets like these provide a good opportunity to gauge whether your risk tolerance is really what you thought it was.

n Diversify. You can’t totally elude a bear market. But you can blunt its impact by diversifying across a range of investments: money market accounts, fixed income investments like CDs and bonds, individual stocks, mutual funds and others. If all your investments are alike, they may all move in the same direction at the same time — a problem in a down market.

n Be “price conscious.” Even during a prolonged market downturn, some stocks can still be expensive. Before you buy any stock, make sure its price is supported by solid fundamentals, such as a strong track record of earnings. You need look back no further than the bursting of the technology “bubble’’ to find examples of stock prices that could not be sustained due to low (or nonexistent) profits.

One “benefit” of a bear market is that some high-quality stocks are attractively priced, because bear markets tend to drag everything down. Eventually, good stocks are likely to recover and continue their forward progress. Are you “waiting for the market to come back” before investing? If so, you’re likely to pay higher prices for doing so.

Ultimately, a bear market can be quite educational. You’ll become acquainted (or perhaps reacquainted) with the importance of finding attractively priced companies with solid business plans, competitive products and seasoned management. And, you’ll likely gain a greater appreciation of just how much risk you’re able to handle. These are important insights, which can serve you well, both now and throughout your financial future.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 8,000 locations nationwide.

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