The Bear's Cave
mPower How To Reason With It
Introduction

Keep In Mind

How To Reason
With It		 The experience of investing during the 1970s bear market should give you a few pointers:
  1. Diversification tends to minimize your losses. If you invested across several asset classes, your investment probably did not decline as much as it would have if you invested everything in one class. Investing in both equity (stock) and fixed-income (bond, money market, etc.) assets tends to reduce your loss in a market decline.
  2. The most lucrative stocks can also be the biggest losers. During bull markets, small-cap stocks have often provided investors with the greatest returns. But, as we saw in the 1970s, they can also account for the biggest losses during a bear market. We're not trying to scare you away from small-cap stocks, or any investment type, but as you've already learned, high risk and high potential returns go hand in hand. There's another point to consider. The type of investing we just did ? contributing a lump sum at the beginning of the investment period and seeing how it performed ? is not the way you invest in a retirement account like a 401(k), 403(b), 457 or IRA. The difference between putting the entire $10,000 into the market at once and investing it in smaller installments (as you would invest in a retirement plan) is more than just an accounting distinction. It can actually save you money, as you'll see in our third pointer:
  3. Disciplined investors do not suffer as much in a bear market. You probably contribute a certain amount of your salary each pay period to purchase your retirement investments. With this kind of incremental investment approach, you will always be buying a batch of assets at the current price. So, for example, if the price of your mutual fund shares declines, you will actually be picking up shares at a lower price ? and getting more shares as a result. This phenomenon is known as dollar-cost averaging. A market downturn will affect your overall investment less if you use dollar-cost averaging than if you invest a lump sum all at once.
  4. One final point, you can't make money on an investment unless the investment does well, which isn't going to happen during a bear market (for example, the Standard & Poor's 500 Index didn't recover its full pre-1973 value until 1982). But, remember, dollar-cost averaging can reduce your loss during a bear market. By systematically contributing to a retirement plan, your investments have a better chance to escape being eaten by a bear.