Lessons Learned: Hug the bear

 No comments  
 E-mail Story
 Print Story
  Share

 digg it!
 Facebook
 del.icio.us
Seed Newsvine
Fark It
Reddit

Text Size: 

Tools Sponsor

By GENE KELLY/Personal Finance Columnist

 The lesson this week: You must learn to embrace bear markets. Dare I say, you have to practice those bear hugs. Why? A so-called bear market — when stocks in the bellwether Dow Jones Industrial Average have dropped 20 percent from a recent high — can be a wonderful time to reinvest dividends or move new money into equities at bargain prices.

Many of the investors who have pulled $45 billion out of U.S. stock funds and exchange-traded stocks so far this year are opportunists who believe they can jump back into the market ahead of the next big rebound.

Anyone who attempts to time the market is on a fool’s errand.

[+]Enlarge

Those of us who are staunch contrarians don’t abandon quality stocks during a bear market, despite the continuing pain. A bearish downturn does offer opportunities to selectively sell stocks or mutual funds to “harvest” losses, a tax-management step designed to offset capital gains.

All told, a mountain of money — roughly $3.5 trillion — is parked on the sidelines, a very bullish sign for equities. Eventually, these dollars will be moved back into the market.

Another bullish indicator can be found in the most recent investor sentiment survey by the American Association of Individual Investors. Bearish sentiment was above 55 percent, nearly double the survey’s long-term average of 29 percent.

The problem is that strong sentiment about the future direction of the market is usually wrong.

There’s no way to know whether the recent bounce in the market signaled a temporary bear-market rally, or was the start of a new, sustained bull market. Generally, a bull market begins when investors see indications that the economy has bottomed.

It’s easy to be pessimistic when stock prices drift down, week upon week. The best way I know to work through the pain of a bear market is to continue monthly contributions to a tax-sheltered account at work or electronically debit your checking account to buy shares of a diversified mutual fund that has solid three- and five-year track records. Portfolio managers get paid the big bucks to lay awake nights, so you don’t have to.

n Are you missing out on hot commodities? Most all the personal finance ideas I write about are based on what I’ve done, am doing now or intend to do.

During the spring, when I urged investors to consider adding a small percentage of gold to their portfolio as a hedge against inflation, it was because the global gold fund I’ve owned the past five years has rewarded me with double-digit performance. The suggestion wasn’t keyed to the fact that gold futures for August delivery hit a contract high of almost $1,040 an ounce on March 17. In fact, the fund I own doesn’t speculate in bullion. It holds shares of mining and precious metals companies.

I’m mentioning this because the double-digit returns achieved by most commodities funds over the past year are increasingly the focus of ads in financial publications.

Although investors had few choices a few years ago, the Morningstar Inc. database now lists about 160 funds which invest in commodities such as yellow gold, black gold (crude oil), grains and copper. Several dozen natural-resources mutual funds are also listed.

Investors who might want to add a slice or two of commodities, to broaden and buffer a portfolio, face a tough decision: Commodities held by these funds often display volatile price swings. Analysts warn that the commodity boom is being driven by speculation, not real demand. And since fund strategies vary widely, performance is unpredictable.

The bottom line: Do your homework. Following major rallies, this may not be the right time to diversify with hot commodities.

n Want more ways to stretch rewards-card dollars? An e-mail from a Lincoln reader notes that the Shell Platinum Select Mastercard offers a 5 percent rebate on Shell gas.

My last column noted that a 5 percent rebate is available from the Discover Open Road card — on gas and auto maintenance — and the BP Visa Rewards card. Since then, I’ve found that the Chase PerfectCard MasterCard offers a 6 percent cash-back reward on gas, for the first 90 days.

At today’s pump prices, getting 5 percent back is equal to about 20 cents a gallon. A 6 percent rebate could be worth up to 24 cents a gallon. You can search for the best gas cards at cardratings.com.

Another Lincoln reader says the “nature of the gas being purchased” should be considered. The energy content of a gallon of Regular-grade fuel gives you “3.5 percent more bang to the buck than Ethanol,” he explained. Even if Regular is priced a dime higher, it is “the better buy,” based on his calculations. If the pump price on both is the same, Regular makes even more sense.

If you have a Lessons Learned topic to suggest, you can call Gene Kelly at 421-2861, write to him at 2611 Bretigne Circle, Lincoln 68512, or e-mail him at genekelly@windstream.net.