Early this spring I acquired 18 baby chicks and began the process of raising them to become fully fledged, egg-laying chickens–a process that normally takes about six months. I have had chickens before, so I knew there would be some casualties along the way. Prior chickens succumbed to neighbor’s dogs, drowning in horse troughs, and being so ornery that they became more appealing as soup than as egg producers.

I figured that if even half made it to adulthood, this fall I would have an abundant source of free-range chicken eggs. In the past with just three or four chickens it seemed like there were always more eggs than we could use.

I never counted on the fox. I live in an urban area where foxes are relatively uncommon. But it only takes one and this one has killed as many as five chickens in a single night. I am now down to two hens and one rooster. I’ll be lucky to have enough eggs to make pancakes for breakfast, let alone enough for scrambled eggs.

So far my efforts to hasten the fox’s entrance into the afterlife have been unsuccessful. But I am holding out hope that the remaining three chickens will survive because they have learned to fly into the barn rafters when the fox makes an appearance.

At some point I realized this experience has many parallels with what investors experience during bear markets.

When investors first put money into the markets, it is only natural that they start anticipating the gains they will make in the near future. If they happen to invest at the right time in a bull market, the money seems to grow quickly. But if their investment is followed by a bear market, they money they invest immediately starts to diminish.

As the account value declines, the reaction from investors is to assume that there is a serious problem. After all, the whole point of investing is to see one’s money grow. Unfortunately, bear markets are as much a part of the economic cycle as bull markets.

Like the fox that is killing my chickens, bear markets give their victims a sense of helplessness. There simply is no way to quickly and easily resolve the problem. Although there are several actions one can take, there is no assurance that any of them will work.

I started by trying to make sure my chickens were safe in their coop at night. But one night the fox figured out a way into the coop. Trapped inside with the fox, the chickens were easy pickings.

I have set traps for the fox, but so far he has not been cooperative about entering.

I have a shotgun by the back door, but the one time I saw him carrying off a chicken he was out of range.

I am now resigned to the fact that survival of the last three chickens is pretty much up to them and out of my control.

An investor trapped in a bear market can try to find an investment that is inversely correlated. During the 2000-2002 bear market many investors moved assets out of the financial markets and into real estate. While a few got lucky, it hasn’t worked out very well for many others. Right now it is very difficult to find any sector of the economy that is advancing. Chasing short-term moves in an attempt to make money often results in investors being caught in moves Wall Street calls “bear traps.”

Those who espouse a buy-and-hold approach would have investors stay in the market and ride out the downturn. There argument is that things will eventually improve and the market will bounce back. Unfortunately that is not a realistic option for investors who are retired or who are near retirement.

Some try to make money in a down market by shorting. In other words, they make a bet that the downturn will continue. But it is a risky gamble and really only suitable for very aggressive investors who can withstand significant losses if the market turns up quickly.

Although it is difficult to accept, during a bear market investors need to stop thinking “how can I make money?” and start thinking “how can I avoid losing money?”

During most bear markets the very best course of action is to move to the sidelines and wait for a new upward trend. By their nature, financial markets are cyclical and bear markets will always be followed by bull markets. That raises the obvious question: When can I get more chickens?

Unless the fox ends up in a trap or within range of the shotgun, buying more chickens right now would seem to be less than prudent.

Perhaps you were thinking of the other question: How does one know when it is safe to move back into the market?

That is when it helps to have a thorough understanding of fundamental and technical analysis. Or if you use the services of a professional money manager, that is why it might be worth paying a management fee even when your account is just sitting in a money market fund.
F.S.