Column: Bear watching the stock market

After years of cheering the stock market as it climbed to record heights, some investors are taking up a new sport - bear watching.

Some people are sure they've caught a glimpse of the bear market, but each time, it has turned out to be an unsubstantiated sighting, and the market has soon regained its losses.

Convinced, however, that the stock market's upward trend won't continue forever, and it won't, some investors are nervously anticipating the arrival of a bear market.

Unfortunately, even those who make a living trying to predict stock market movements are rarely accurate. History has proven that. Thus far, every significant advance in the stock market has been followed by a correction. However, whether that correction will occur in two weeks, two months or two years, no one knows.

Wise investors know market timing is futile. Instead, they adopt a plan that offers protection in the event of a stock market decline. This plan does not include abandoning stock or stock mutual funds. Since the early 1950s, there have been 15 bear markets, periods of time when the Standard and Poors 500 declined 15 percent or more. During each of these declines, the stock market fell an average of 24 percent. Certainly the thought of watching your $10,000 investment fall to $7,600 is not a pleasant one. However, history has shown that not only has the stock market fully recovered from each of these bear markets, it has gone on to reach new highs.

While no one enjoys watching the value of their investments fall, a period of eight or even 18 months is a very short span in the 20 or 30 years that most people spend investing. In addition, temporary declines in stock prices offer opportunities for investors to purchase shares of great companies at more reasonable prices. Think of it this way. When your favorite brand of clothes go on sale, do you focus on how much you paid for them the last time? Probably not. Instead, you most likely go buy some more to take advantage of the great prices.

If you want your portfolio to be in the best shape possible to weather a market decline, make sure you own good quality companies. While the stocks of strong companies are not immune to market declines, their prices typically do not fall as much as those of lesser quality companies, and they generally rebound faster.

Stocks that are most vulnerable during market declines are those that have very high price/earnings ratios - the hot stocks of the day. Heavy concentrations of Internet stocks, for example, should probably be reduced and replaced by stocks in more reasonably valued industries.

The value of owning good quality stocks over long periods of time cannot be overstated. Only stocks offer the inflation protection you need to ensure that you don't outlive your savings. To realize their long-term rewards, however, stock owners must live through short-term declines. During those uncomfortable periods, remember the worst thing a bear market can do is scare you away from the investments you need most. If you would like to seek professional advice, call me at 882-6070.

Carol Perry, a Northern Nevada resident since 1983, represents the firm of Edward Jones Investments in Carson City.