FOOL ON THE HILL
Sleeping Through the Bear Market

For all the pain we're going through now as investors, it could be worse -- it could be the '90s again. If you accept it, you can make the bear market work to your advantage. You might even sleep better. Just be sure to look out for yourself. Prepare for the worst, hope for the best, and sleep with one eye open.

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By Bob Bobala (TMF Bobala)
July 12, 2002

I have to admit, aside from the crooks and the cooked books uncovered over the past year, I've been at peace with the bear market. In fact, I've slept better through it.

I know that sounds asinine and perhaps even irresponsible with the Enrons and WorldComs of the world threatening the markets as we know them. But hear me out.

I was one tense individual during the bull run of the late '90s. Stocks I didn't own -- such as Amazon.com (Nasdaq: AMZN), Cisco Systems (Nasdaq: CSCO), America Online (NYSE: AOL) before the merger with Time Warner, Yahoo! (Nasdaq: YHOO), and hundreds of others -- seemed to be hammering out double-digit gains on a daily basis. In fact, many of them were gaining the stock market's average historical return (about 10%) a few times a week. That's a lot of locomotion.

I ground my teeth for months because I was missing out. Against my better judgment, I "invested" in each of the companies named above to get a piece of the action, and I rode the daily euphoria -- sheepishly and alone. (I wasn't proud of what I was doing, though I was lucky.) I sold and then felt I was cheating myself as my former holdings went even higher. It was exhausting.

Nowadays, when you realize Rip Van Winkle could have woken up this morning to find the Nasdaq in the same place it was five years ago, I'm suddenly at peace with myself. Gearing up for the next big accounting scandal -- while it does make the blood boil -- just isn't as taxing for me as watching theglobe.com race ahead 300%. I've mellowed.

Sure, if I look at my 401(k) statements -- and that's a big if since I've moved beyond self-flagellation -- I can see the damage done. But I do take heart that I'm dollar cost averaging into the market every paycheck, and with each dip of the S&P 500, my long-term upside gets greater and greater.

Outside of the index funds in my retirement plans, I have had the fortune of having a complicated, busy, hectic, fun life -- one that has prevented me from having the time to choose individual securities. That has probably been a blessing for me. Standing on the sidelines, piling up a little short-term, interest-bearing cash, has suited me well. I'm a little closer to being prepared for the financial apocalypse should it ever come.

Not that I advocate sleeping through the bear market entirely. We still need to be vigilant. Sleep with one eye open. On a grand scale, we need to look out for the colossal catastrophes like Enron, and more importantly work to effect any legislation that might be enacted as a result of Wall Street's mess. But we need to avoid being ripped off on a smaller scale, too.

Case in point: I woke up last weekend and started cleaning up my desk at home. In the pile were several months of brokerage statements that I hadn't even bothered to open. (Like I said, my holdings outside of my retirement accounts -- and sheesh, even there -- are minimal. I've hung on to some shares of Cisco, just to remind myself that I can go insane at any moment, and mostly added some money to a margin account that I haven't used.)

I looked through the statements to see what kind of piddling interest had accrued in my brokerage money market account and saw that it had actually declined. For a second, I freaked. I mean, technically money markets aren't guaranteed to hold the value of your dollar, but they're pretty darn close to a sure thing. I had to look back through three months of statements to see the culprit: The broker was deducting fees from my account due to inactivity. In essence, I was being punished for not trading.

I looked through all the paperwork trying to find the "Dear Valued Customer" letter that explained I was important enough to them to be charged $80 in fees per year. I couldn't find it. I did find, however, a different note stating that the asset requirement to qualify as a "premier" customer had decreased to $250,000 from $500,000. Well, bully for me! When I get up to 250 gees, my stock commissions actually drop. In the meantime, if I have under $10,000 in assets, they're going to charge me $20 per quarter.

I did what any respectable Fool would do: I closed my account.

I relay this story not to pick on one unnamed brokerage house. This one in particular had some decent services, and if it suited my current needs, I would have stayed with them. But you have to be mindful. These aren't the roaring '90s anymore. Even if you feel safe on the sidelines, you have to make sure you're not getting screwed.

Given that, here's three tips I'm following for sleeping through the bear market:

Assess your needs
Between naps, assess your own situation. Determine your own needs. Don't get ticked at your broker just because I did. Evaluate the services you're getting. For example, the companies in our Discount Broker Center all offer something different. Some of them are geared to investors who trade frequently. Others function more like regular banks, with direct deposit, check writing, and ATMs. Figure out what you need and what's most cost efficient for you before you head back into hibernation.

The glory of auto-deposits
Think about this: If you're dollar cost averaging into the Nasdaq as a whole, you're getting prices from five years ago -- fully half off their all-time high. If you're regularly putting your money into any passive index fund that models the market, your nest egg has a far greater shot of growing into something substantial than it did two years ago. Automatic deposits while you're in a stock market coma can be a great thing.

If you've got the stomach, try individual stocks
Actually, it probably took more guts -- or was it stupidity? -- to put your money in Yahoo! when it was $250 per share. That's not to say that stocks are all cheap now. They could fall even lower, much lower. Your job is to find quality at a reasonable price. We can help. Try Motley Fool Select or David and Tom Gardner's Stock Advisor. Go to Fool's School and read up on securities analysis. Take our When to Sell: The Foolish Selling Strategy online seminar -- if you know when to sell, you also know when not to buy (sorry for the shameless promotion, but I'd be stiffing you if I didn't say you can get a sweet deal on Select and the seminar if you purchase them together). Read the "Fool on the Hill" column regularly. The writers often uncover stock ideas they think are worth further consideration.

Prepare for the worst
And remember this: As much as you may want to stay in suspended animation until the bulls come home, there's no way to know when they'll come galloping down Wall Street. I don't care what any talking head says on TV. No one knows when things will turn around. It could be tomorrow, next year, or five years from now. So be prepared for the worst. Don't over-extend yourself financially.

You know how your father always warned you to have a rainy day fund? (Okay, mine didn't either -- my folks were too busy running up their credit card debt.) The rain has come. Stash some cash away in safe vehicles so that when you do wake up from your bearish slumber, you'll have something to fall back on -- just in case.

Okay, I'm going back to sleep now. Can someone please just open my mail once in a while? Please? Wake me if I miss something big -- real big.

Bob Bobala also could have written a column about insomnia in the bear market, but that's another story. He still holds Cisco just to punish himself. Currently, he doesn't own any other individual securities, but pumps money into an index fund every two weeks. The Fool has a disclosure policy.