Learning to Live with the Bear Market

This current bear is rewriting the rules of investing.

Living with the bear can be tough. The S&P 500 benchmark has lost 42 percent of its value this year, and the Dow Jones index has plunged by 37 percent. The bear market is well entrenched, and this one's a doozy, with far-reaching implications.

What's a bear market?

Traditionally defined, a bear market is a 20 percent drop across several important market indices, lasting for at least two months. Since reaching a top in October 2007, the markets have plummeted drastically, easily meeting those criteria.

When the stock market goes down, other investments, like bonds, gold, or real estate, are supposed to do the opposite, cushioning the fall for a wisely diversified investor. It's not working out that way, though. This bear is reaching out and dragging down other investments, too.  Safe havens aren't so safe anymore.

Personal finance alternatives

Gold prices are falling. Oil is back below $50 a barrel, down from a high of $145, which brings gas prices to four-year lows. That's great for your personal finances, but bad for those investing in oil, gold, and the companies that produce them.  For investors, jumping over to raw materials hasn't worked.

As for the real estate market, numerous homes are in foreclosure, and are still sitting empty despite fire sale pricing. House flippers are hurting badly. Real estate has been pounded in this storm, too.

Troubled mortgages have been a major factor in the recent banking crisis. Repackaged into supposedly safe bonds, subprime mortgage assets were passed around the U.S. financial system like hot potatoes, keeping the system liquid and profitable. When the risky loans started to default, the bonds became worthless, and the whole investing scheme fell like a house of cards.

How about international stocks? When the local market crashed, surely some other financial Mecca could have sheltered investors from the storm?  Unfortunately, there were none. A surging American dollar has gutted returns from abroad, and international stock funds lost money for American investors in 2008.

The one investment category that has done really well this year is the explicitly bearish strategy of shorting stocks. That's been a risky bet for years, but now it seems like one of the only ways to make money as an investor.

Saving personal finances

Your mattress may be starting to look like a good place to stash your cash-but don't do it. The bottom of a bear market is an excellent time to invest in stocks that have become really cheap. It takes a stoic attitude to do this, of course, and there's no guarantee that we've hit rock bottom yet. But even this fierce grizzly will eventually go back into hibernation, and if you can stomach a few more months or years of poor performance, investments you make today should become your best performers in years to come.