Bear Market Drill Useful In Event Of A Sell-Off

Special advisory to mutual fund investors: We interrupt today’s business news to bring you a bear-market preparedness drill.

This is only a drill. An actual bear market may or may not be approaching, after the dramatic rise of stock prices over the past 2-plus years, but there is no way to identify it in advance.

Many people who try to figure out when stocks are due for a sustained setback, and pull their money out beforehand, wind up guessing wrong and causing themselves a lot of recordkeeping and tax hassles besides. So any effort to dodge bear markets can get people into at least as much trouble as it prevents.

What fund shareholders can do right now, however, is to conduct a simple arithmetical exercise to see how well prepared they and their fund investments are to withstand the shock of a market reversal.

There’s no way to know how big and how bad any future bear market might be. But you can get a sense of what it might feel like by running your present investments through the math of past declines.

Start with a up-to-date value of all stock and stock-fund investments you own, including any that you hold in retirement savings vehicles such as individual retirement accounts and employer-sponsored 401(k) plans.

Then, with your calculator or pencil and paper, subject that total to the 24 percent loss that occurred in the average recent bear market (and, if you wish, to the 48 percent decline in the worst instance).

Now, says the Van Kampen American of Oak Terrace, Ill., ask yourself these questions:

“If this were to happen, could I still comfortably cover living expenses?

“Could I still finance important near-term goals, like paying for college, a down payment on a house, or buying a new car?

“Could I live with the idea of not recovering my losses for over a year or possibly more?”

The point of these calculations, it becomes clear, is to determine whether you are actually as ready to ride out a bear market as you think you are. It’s one thing to describe yourself vaguely as a long-term investor - but maybe something quite different to face specific bear-market pressures on your finances in a real-life setting.

Any investor would like to be able to stay cool through the next bear market. Answering yes to the questions posed by Van Kampen American may improve your chances.