Dow 5,000?

It may be tough to remember amid the market's massive sell-off, but it wasn't too long ago that everyone was gaga over Dow 13,000 -- even me. Sure, it was just an arbitrary milestone -- but still, like observing your odometer as it rolls over to a fresh set of zeroes, it was fun to watch anyway.

Besides, to the extent that the market's rise reflects investor optimism about corporate fundamentals and earnings -- as opposed to a top-down assessment of economic trends -- 13,000 is an arbitrary marker with investing substance behind it.

Call it the best of both worlds.

Alas, what goes up ...
... usually comes down. Consider, by way of dramatic (and protracted) example, the meltdown that began in early 2000.

As you may painfully recall, the market tumbled hard then -- and for quite a long time. Indeed, between March of that year and the close of 2002, the S&P-tracking SPDRs (AMEX: SPY  ) declined by 34%. Meanwhile, the Cubes ETF (QQQQ) -- which tracks the Nasdaq 100 and counts Research In Motion (Nasdaq: RIMM  ) , eBay (Nasdaq: EBAY  ) , and Amgen (Nasdaq: AMGN  ) among its top holdings -- shed some 77% of its value.

With those cautionary tales in mind, savvy investors should strive to ensure that their basket of investments is spread intelligently across the market's valuation spectrum. Buttoned-down "value" stocks, for example, tend to hold up better than growth-oriented fare does during downturns.

Case in point: During the period cited above, the Russell 1000 Value bogey -- which specializes in the lower price-to-earnings likes of ExxonMobil (NYSE: XOM  ) , Devon Energy (NYSE: DVN  ) , and Bank of America (NYSE: BAC  ) -- declined by "just" 14%, while the S&P and Nasdaq 100 shed between a third and three-quarters of their value.

Things are looking up
Some investors, meanwhile, actually made money over that stretch. While I headed up Champion Funds, I recommended a fund that posted a gain of more than 28% while the aforementioned indexes were headed south. This fund, in other words, played a mean defense, and over time, its rewards have been plentiful.

The Foolish bottom line
Contrarian that I am, I think a great way to celebrate any market milestone or to invest during pullbacks is by reviewing your portfolio to ensure that you have a well-diversified, comprehensive group of both funds and stocks that are sure to see you through bull markets and bears.

Sound interesting? Good deal. You can snag a special free report -- The 11-Minute Millionaire -- and you're also invited to learn more about the Fool's set-and-forget investment service, Ready-Made Millionaire. RMM features a high-octane ETF, a clutch of Grade A mutual funds that span the globe (and the market's valuation spectrum), and four stocks that we believe are poised for outperformance over next three to five years and beyond. We're so confident in our lineup that the Fool has plunked down a million bucks on the portfolio -- and the doors will swing open to new members again next month. Just click here to grab the free report -- and to be notified when we reopen.

This is an updated version of an article first published April 24, 2007.

Shannon Zimmerman doesn't own any of the securities mentioned above. Bank of America is a Motley Fool Income Investor recommendation. eBay is a Stock Advisor choice. You can check out the Fool's strict disclosure policy by clicking right here.


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  • Report this Comment On October 10, 2008, at 10:44 AM, mkttrdr wrote:

    Spy holds 80. But any close below is a base that goes to test 1994 at 45. Pray not. Fear not.

    Renters are everywhere. Great time to be a landlord if ya can handle that.

  • Report this Comment On October 11, 2008, at 2:32 PM, stockmt1 wrote:

    I will say there will be more financial, insurance institutions to collapse (already 2 more banks failed on Friday) in months ahead. The worst has yet to come... who's going to pay the insured credit default swaps? In Lehman Brothers' case, the payouts is expected to be in between 400 to 600 billion. Link: http://www.nytimes.com/2008/10/11/business/11credit.html?em

    More banks, insured companies going under for sure in the months ahead... remember, CDS is not a regulated market and its size is more than 55 trillion... 5 times more than the size of US GDP.

    It's probably now too late to rescue the banks or create the market for CDS... given its size, number of clients involved, etc.

    We cannot use "history" to predict this market... because this market is the result of:

    a) Excessive credits since the 1950s (to buy cars, houses, machineries, etc.)

    b) 55trillion, unregulated CDS market (Can the companies afford to pay the 400-600 billion) Lehman Brother's CDS? Remember you also have Washington Mutual, etc.

    c) bankruptcies, foreclosures still rising VS last year

    d) More countries may face credit downgrade watch due to excessive spending

    This means no matter what G7 or G20 is doing... the TED spread, LIBOR rate may rise over time... until we see housing prices going up... (may take awhile!)

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