Gail MarksJarvis: For some investors, selling in a bear market isnít such a bad idea

McClatchy-Tribune Information Services

February 8, 2016

The bear market is back, ripping apart your 401(k) and perhaps disturbing your dreams for the future.

People who promised themselves they would never let their money be devastated again after the last bear market in 2008 find themselves again with losses now that stocks worldwide have gone into a bear market. Thatís a 20 percent decline in the MSCI All-Country World Index, which contains U.S. stocks as well as those from throughout the world.

If you have an international or global stock mutual fund in your 401(k) or IRA, itís probably behaving a lot like this index.

The losses you may see now and the bear market label can be frightening. But the label doesnít actually provide a lot of information to people trying to figure out what to do with their money. The bear label simply tells you that if you have money in stocks around the world, you probably have lost about 20 percent at this point in those investments. It doesnít guarantee that stocks will fall a lot more and leave you with worse losses. Nor does it say anything about whether stocks are about done falling and ready for a recovery.

If thereís no recession, a 20 percent decline may be about the worst of the decline. On average, the U.S. stock market ó or the Dow Jones industrial average ó falls 19 percent when investors are simply rethinking what theyíve paid for stocks and selling them because they think they overpaid, according to research by Ned Davis Research. Currently the Dow is down only 14 percent, not as bad as the globeís decline.

But if the economy goes into a recession ó and so far the U.S. is not in recession ó people can lose 30 percent on average in a bear market that lasts on average 18 months. Since thatís an average, of course, the loss can end up worse or better. Between late 2007 and early 2009, for example, the loss was 57 percent. People did recover if they kept their money in the stock market, but it took about five years.

Since recent headlines labeled the global stock market a bear, individuals have become nervous. Financial planners say they are getting an abnormally high level of calls from jittery clients.

Generally, financial planners tell people to sit tight and ride out losses while awaiting the upturn that will arrive at some point. But that doesnít mean there wonít be some painful losses temporarily or that financial planners have any insight into when the pain will stop.

"We have no control over the stock market," said Northfield, Ill., financial planner Edward Gjertsen.

Instead of predicting the stock market, reliable financial planners tend to remind clients that during the calm period when the client first sat down with the planner, they thought about bear markets coming up at some future time and inflicting losses. In those planning sessions, they arrived at a combination of stock and bond investments that would diminish, but not prevent losses, while giving people a chance to make money in good times. So many individuals are being told by their advisers now that "buy and hold" makes sense.

Thatís valid, but the "buy and hold" mantra can also be misleading to people fending for themselves. While people with solid financial planners are likely positioned to outlast a bear market, many people near or in retirement are not, said Christine Benz, Morningstar director of personal finance.

Some people should sell stocks, she said. Admittedly, now would not be the ideal time after a harsh decline in the stock market. Last summer would have been far better, while stocks were climbing and investors werenít worried about a slowing economy undermining stocks. But, Benz said, if people are in retirement or about to retire and have no cash or bonds available to cover living expenses over the next few years, they should be thinking about how to give themselves that cushion so they donít have to sell stocks if they fall even further.

Benz notes that people were lulled by the 180 percent climb in the stock market after 2009 and began to ignore their investments. So while in 2009, they might have vowed to be cautious forever, inattention to investments now has left them out of step with their intent. Cautious portfolios, with half of money in stocks and half in bonds in 2009, morphed over time into more risky portfolios of 70 percent in stocks and just 30 percent in bonds.

So, Benz said, it makes sense for people without cash available for living expenses in retirement, to look for opportunities to sell some stocks ó not all stocks ó and reserve cash. Even if stocks are in a bear market, there are often rallies that give people opportunities to sell. Try to avoid selling on days when the stock market is falling.