How to Survive When Stocks Behave Badly

The bull market may have swelled the proportion of stocks in your portfolio inordinately. If that’s the case, rebalance. Sell some high value stocks and put the money into bonds. Later on, if the stock market falls, you can sell some bonds to buy stocks. Better yet, let a balanced fund (or a target-date fund), do it automatically.

Diversify with cheap index funds.

Diversified, low-cost, broad-based index funds, which mirror the overall market, are a much safer way to invest in stocks and bonds than buying individual securities.

If you pick the right stock — say, Apple — and hold it for decades, you will outperform any index fund. Since 1989, the numbers show, Apple’s returns are about 20 times greater than those of the S&P 500.

But picking and holding a stock like Apple from the beginning is exceedingly difficult. Apple was a miserable stock through much of the 1980s and 1990s. Would you have known to stick with it when it was near bankruptcy? I did not.

Furthermore, unlike Apple, roughly 96 percent of the securities in the U.S. stock market don’t earn money for investors at all over long periods, according to research by Hendrik Bessembinder, a professor of finance at Arizona State University. Professor Bessembinder has since found that in global markets, too, most stocks won’t earn you money over the long run.

Broad, low-cost index funds takes care of these problems. You’ll own little pieces of a lot of mediocre stocks, but the winners have pulled the indexes higher, regardless.

None of this guarantees that you will make money in stock funds, however.

After bear markets, American stocks have always come back and redeemed their losses. But that might not be true forever.