General Philosophy and Observation

To many people, it seems prudent or fashionable to say or believe they are long-term investors. Their policy is to stay fully invested through thick and thin. Indeed, some institutions follow this philosophy. This inflexible strategy can at times bring tragic results, particularly for individual investors. Individuals and institutions alike may get away with this nonmovement in several relatively mild bear markets that decline 20% or less. However, many bear markets are not mild, and some are down-right devastating.

The problem is always at the beginning when you first start to sense an impending bear market. You cannot, in every case, project how bad economic conditions might become or how long they could linger. For example, Vietnam, inflation, and tight money helped turn the 1960-1970 correction into a two-year decline of 36.9%, whereas prior bear markets typically averaged only nine months in duration with 26% market downturn.