Safe to invest?

Avoid market timing and know your risk appetite before you commit money to equities.

How will you know when the bear retreats and it’s safe to invest in stocks? Contrary to most Wall Street pundits and economists – who have a bent for being consistently bullish – you probably won’t know the right moment. Nor will the experts.

Bull and bear stock-market timing doesn’t necessarily follow any political, weather or cosmic cycles.

Only two variables hold true: If inflation is double-digit nasty or deflation rampant, hold on to your cash. It’s going to be a rough ride.

The Great Depression, which lasted from late 1929 to 1941, was a case in point. After a period of robust stock and housing markets in the 1920s, Wall Street sputtered for a decade.

Like a storm system, the Depression’s market malaise wasn’t a single event, but a series of tiny rallies and disproportionate declines. The most horrendous part of that dip was from Sept. 6, 1929, to June 1, 1932, when the index of large stocks tracked by Standard & Poor’s fell 86 percent, according to Leuthold Weeden Institutional Research. Surprisingly, the initial crash of the Depression wasn’t the longest single bear market, which was from Dec. 31, 1909, to Feb. 28, 1915, when the Dow Jones Industrial Average lost 29 percent. To this day, the bleak 1930s have no precedent. More than 10,000 banks failed and 25 percent of the workforce was jobless. Hopelessness and homelessness were frequent companions.

No rival
Of course, the current economy may sink further, but it has a long way to go to truly rival the Depression years.

Many in government considered giving U.S. President Franklin Delano Roosevelt emergency powers akin to a dictator to fix the economy in 1933. There was even talk of him empowering a private army of American Legion veterans, Jonathan Alter writes in “The Defining Moment” (Simon & Schuster, 2006).

While many would say stocks rallied unabatedly as the U.S. economy partially recovered during and after World War II, that wasn’t really the case. Stocks, as measured by S&P indexes, dropped 45 percent from Nov. 11, 1938, to April 28, 1942, and 30 percent from May 29, 1946, to June 13, 1949.

Those who bet on an uninterrupted postwar rally were also disappointed. At the height of the baby-boomer growth years, stocks lost 22 percent from Aug. 2, 1956, to Oct. 22, 1957.

Did the ebullience of the Space and Information Ages finally vanquish the bear? The worst markets since the 1930s were from Jan. 11, 1973, through Oct. 3, 1974 – down 48 percent – and from March 24, 2000, to Oct. 9, 2002, when stocks fell 49 percent.

Blame for crashes
Most economists agree that the wretched 1970s markets could be blamed on oil-related price swings and the combination of low- growth/high unemployment and inflation or “stagflation.”

The most recent bears – including the current slump – were due to old-fashioned bubble bursting. Dot-coms, housing and credit all blew up because of a mass hysteria that Wall Street so loves to exploit. It would be hard to see an end of the current bear market without governments or markets resolving the banking, housing and employment crises.

What’s the moral to this grim history? In terms of numbers, you could have lost an average of 37 percent over 19.5 months in bear markets since 1900. Markets have been – and will always be – volatile. Stocks don’t get less risky over time.

Does that mean you need better timing methods, more quality research and better advisers?

History hasn’t proven that humans have gotten any better at timing markets. They consistently miss the best times to exit and enter. If you stay in too long, you lose more money. Should you wait too long to re-invest, you will squander even more.

Some rules
It’s comforting to know that a handful of guidelines still make sense. Follow them and you can protect your money no matter how stocks perform.

Turning your concerns toward your personal financial planning will make timing bear markets a moot point. This is true whether you live in Shanghai, Moscow, New York or London.

– Forget the timers, experts and analysts. Everyone has cataracts when it comes to seeing the future. Plan based on your own ability to handle losses. Can you afford to lose a third or more of your nest egg in a bear market? If you are within seven years of retirement, most of your money shouldn’t be in stocks.

– Plan for cash flow, not total return. How much monthly after-tax, after-inflation income will ensure you a comfortable lifestyle during retirement? That’s a realistic number to concentrate on. No one can predict future appreciation of stocks consistently.

Stocks still risky
– Stocks will always be risky. It doesn’t go away, no matter what Wall Street says. To generate that golden-age lump sum safely, you will need a carefully constructed, well- diversified bond and stock portfolio that also protects you against inflation.

– Invest in yourself and forget about your portfolio. You shouldn’t ever be losing sleep over your investments. Learn something new. There’s more to life than fretting about a financial nightmare that never seems to end. Start with gaining insight into how much risk you can handle in your portfolio and what you can do to reduce it. The truth can be a real bear, but you need to face the beast head-on and protect your principal.

The author is a Bloomberg News columnist. The opinions expressed are his own