What If the Market Pessimists Are Right?
It's a common belief among many Wall Street veterans that the market strength of the past two years is only a brief "cyclical" respite in the midst of a long-term "secular" bear market. They recite the following bearish factors: (1) profit margins, now at record levels, are unsustainable; (2) interest rates are rising; (3) inflationary concerns are growing; (4) oil prices are at record highs; (5) the dollar has been weak and its future is uncertain; (6) we have huge, growing federal budget and U.S. trade deficits; and (7) another major terrorist attack on U.S. soil seems inevitable. Their logical conclusion: stock market disaster is lurking around the corner.
There are reasonable rebuttals to most of their bearish concerns, plus there are many counterbalancing bullish factors which they dismiss. So, I don't necessarily believe the pessimists are right. But what if they are? For the sake of discussion, let's take a closer look at their scenario. First, a little background. While most of us use the word "secular" to describe something as worldly in contrast to having a religious connotation, market analysts have a lesser known dictionary usage in mind: "relating to a long term of indefinite duration." The last secular bear market began about four decades ago when the S&P hit a high of 94.72 in February 1966. More than 16 years later, in August 1982, it recorded its last bottom.
After all that time, what did buy-and-hold investors in the blue-chip S&P 500 receive for their efforts? A meager 0.5% average annual return (plus dividends). This record of futility gives the impression that those 16 years were unrelentingly bleak. Not at all. They contained four cyclical bull markets which averaged just under 68% in average gains. You can see in the table below that even during this bearish megatrend, there were growth opportunities. If you find the pessimists' arguments credible, what should you be doing now to take advantage of them?
• Strengthen your financial foundation. You don't have as much to fear from economic storms if you're debt-free, have an emergency reserve, and are living on a budget that produces a monthly surplus.
• Review your plan. If you lack the kind of specific investing blueprint that provides confidence and stability through difficult markets, set aside time now to develop an asset allocation and investing strategy that's tailor-made to your family's situation, investing temperament, and season of life.
• Upgrade, don't index. We offer Just-the-Basics for those who want to spend little time on their investments. But if you believe the secular bear market scenario, you need to expect that over several up/down cycles, your index funds are going to generate mediocre results. On the other hand, Upgraders saw our portfolios excel during the good times in 1999 and 2003 while still weathering the 2000-2002 bear market quite well. We outpaced the market 11.9% to 2.4% annually over the past six years. If you've been holding back, maybe it's time for you to become an Upgrader.
• Add other strategies, but sparingly. You might wish to add further diversification by layering one or more of our advanced strategies 
on top of your core Upgrading portfolio. Theoretically, they can help reduce risk during the down phases. But if you do, use them as substitutes for no more than 20%-25% of your stock allocation.
• Keep on keepin' on. If you invest regularly, you should continue doing so regardless of market conditions. Your long-term dollar-cost-averaging strategy will use the bear market phases to your advantage. 
- Got a question or comment about this article? Discuss it on our Message Boards.
