"JUST BECAUSE the river is quiet doesn't mean all the crocodiles have left," runs an old saying.
Although stocks have recovered about half their recent 9.7 percent losses, there's no guarantee we won't suffer another downturn. Since 1900, Wall Street has been hit with 29 bear market plunges of 20 percent or more, 50 severe corrections of 15 percent and 106 setbacks of at least 10 percent. How do we prepare for the next shock wave? Suggestions:
If most of your stock "eggs" are in one basket, take some out. Then if one sector is hard hit -- as high-tech stocks were battered recently -- other categories cushion the overall decline and discourage panic selling.
Speaking of panic selling, Money magazine's May issue says, "By selling into a bear market, you turn paper losses into real ones." A Wall Street veteran told me, "Never sell good stocks in a bad market."
And I found that people make more mistakes selling good stocks than buying bad ones. If you invest $10,000 in a "dog," the most you can lose is $10,000. But if you sold $10,000 of Coca-Cola -- which quintupled in five years -- you missed a huge profit and maybe more to come.
If you're preparing for a bear market, concentrate on objectives. If you're investing for retirement 15 years away, who cares what the market does today? But if you're putting away two-year college money, reduce risk. Eliminate speculative issues and cut back on aggressive growth funds which, in the 1973-1974 crash, lost an average of 46.4 percent.
Be informed; talk to and read about experienced people who survived bear markets. Financial historian John Kenneth Galbraith said, "Some day, no one can tell when, there will be another speculative climax and crash."
Expect surprises. The more you know about investing and how markets unexpectedly gyrate, the fewer mistakes you will make.
Be realistic. Nobody can warn you when the next bear market will hit. In January 1973, a New York Times poll of eight "experts" predicted, "the market will move somewhat higher," but the Dow Jones industrial average plunged from 1,052 to 577 in two years, a 45 percent free fall equal to about 3,000 points today.
Some other thoughts:
"Don't believe anybody who says a stock market crash can't happen again. It will happen, damn it." (James Stowers Jr., founder, Twentieth Century Funds.)
"There's nothing wrong with a cash reserve; it gives you time to think." (Robert Prechter.)
"Cash quiets the nerves." (1997 Stock Trader's Almanac.)
"Don't try to buy at the bottom and sell at the top. This can't be done, except by liars." (Bernard Baruch.)
"The usual bull market successfully weathers many tests until it DTC is considered invulnerable; then it's ripe for a bust." (George Soros.)
Pub Date: 4/18/97