How your 401(k) can survive the next bear

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The bull market, now the secondlongest ever and celebrating its ninth birthday Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20 percent from its peak.

While a drop of 20 percent from a prior peak is the classic definition of a bear market, the average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9 percent, S&P Dow Jones Indices said.

Here are some tips to help you and your 401(k) survive in tough times.

“The best way to survive a bear market is to be financially prepared before one happens,” said Jamie Cox, managing partner for Harris Financial Group. That means not having 100 percent of your money invested in stocks near a market top. It means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

If your portfolio was designed to have, say, 60% in stocks, and that percentage has ballooned to 80% due to rising stock prices, consider “rebalancing” your portfolio. Sell some stock to get back to your initial 60% target.

The time to be aggressive in the market is when stocks are up and you can make tactical moves likes cashing out stocks, said Woody Dorsey, president of Market Semiotics, a Castleton, Vt.based investment research firm. It makes more sense, he said, to be defensive when the market is entering or in a period of falling prices.

One simple strategy is to get “less exposed to the market and raise cash,” Dorsey said. While a normal portfolio might consist of 60 percent stocks and 40 percent bonds, a bear market portfolio might be 30 percent cash, 30 percent U.S. stocks, and the rest in foreign investments and bonds.

Investors could also consider defensive strategies employed by professional money managers, he said. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise.

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” said Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he said, even if it seems scary. “You have to be willing to step in” when market valuations fall a lot, Wilson advises.