Reader Question: What to Do if a Bear Market is Coming?

The recent market plunge has generated quite some debate among PF bloggers what we should do (if we should do anything at all) with our investments in the event that major indexes lost 5% in just a couple of days:

If you ask me, I would say it was nothing but a buying opportunity if you already have something on your mind and just wait for the right time to enter (I bought 70 shares of VBR the day after the sell-off); otherwise, I won’t do anything special. 500 some points drop in one day is big. But if you put it into the perspective of long-term investment, a short-term decline, even at the 5% magnitude, is probably nothing and, therefore, doesn’t warrant a upside-down overhaul of a portfolio.

Yesterday, I received an email from a reader that brought up the question of what to do if a bear marketing is coming (Greenspan saw a 33.3% chance for a recession this year):

I spent 10 years in the military and separated with no retirement, 401K, or home equity. In the past 6 years I have managed to invest my money and accumulate about $45,000 in my 401K. I have managed my own funds and averaged an 11% return annually since 2001. In November, I moved all my 401K to cash (in a money market account) to lock in my gains, (except new money, they are still allocated into my different funds) because I feel like I have some catching up to do due to my years in the military accumulating nothing. Now that the market has somewhat corrected, should I redistribute my monies back into stocks or does everyone feel like a bear market is coming and I should wait? Just curious.

For me, knowing that I won’t be using the money in my retirement accounts in another 30 years, I won’t do anything dramatic even if a recession is on the horizon (but who can predict that anyway?). I’m fine with increasing the cash portion of my portfolio if I am not confident with the direction the market is heading, but wait and stop participate is not an option.

What will you do in this event? Escape or stay the course?

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2 Responses to “Reader Question: What to Do if a Bear Market is Coming?”

  1. Jason |  Mar 10, 2007 at 1:12 pm

    Trying to time the market by predicting a recession or correction in the market will only get you frustrated unless you have a crystal ball. If you are uncertain about where the market is going, it would be a good idea to take some defensive positions in bonds or bear market funds, if only to diversify your holdings. Overall, I have not changed my positions significantly due to the recent dip. In fact, I viewed it as a buying opportunity.