How to thrive when this bear dies

By Jim Jubak

Believe it or not, someday, almost certainly within the next 12 months, the bear market will be over. Then investors will have an opportunity to rebuild their wealth if stocks come roaring back, as they typically do.

So all you have to do to rebuild your portfolio once the bear is over is to plunge back into the stock market, right? Ah, if it were only so simple.

Because the character of this bear market won't be clear until years after it's over, it's hard to come up with an optimum rebuilding strategy. Still, I believe you can design a strategy that maximizes your gains while minimizing your losses, even knowing what little we know now.

I'm going to lay out my ideas for that best possible rebuilding strategy in this column. It will pull together the themes from a number of my recent columns:

• Emerging stock markets ("Smart risks for cautious investors").

• The financial sector ("10 financials you'll want to buy").

• Commodities ("Be ready for the commodity comeback").

• Other sectors to buy ("10 trends for long-term gains"), which draws on my forthcoming book "The Jubak Picks," set for publication at the end of December.

• And a suggested timetable for implementing this rebuilding strategy ("Your guide to the next 12 months").

If you look at what happened after other bear markets, such as that of 2000-02 or 1972-74, the huge bounce in the first year after the end of the bear is about the only thing they had in common. The S&P 500 Index's ($INX) first-year bounce after the 2002 low was 34%. After the bear market low on Oct. 3, 1974, the S&P gained 38% in the next 12 months.

The bounce after the 2000-02 bear

In the case of the 2000-02 bear, the initial rush after the end of the bear delivered a huge share of the 101% gain for the bull market that ran from October 2002 through October 2007. In the 16 months from the Oct. 9, 2002, low through Feb. 9, 2004, the S&P 500 gained 47%.

The gains from the remaining years of the "great" bull market of the "Oughts" were rather anemic: just 9% in 2004, 3% in 2005 and 14% in 2006. Of those three years, only one showed gains above the 10.4% average annual return for the S&P 500 from 1926 through 2007, as calculated by Ibbotson Associates. (Gains, of course, don't include dividends and returns do, but you get my drift.)

A great part of the remainder of the 101% gains from the 2002-07 bull is really a result of compounding that initial 47% 16-month gain at relatively modest rates over the rest of the bull market.

The recovery from the 1972-74 bear

The recovery from the 1972-74 bear market was out of the blocks even quicker. From the Oct. 3, 1974, low to July 15, 1975 -- that's about 9 1/2 months -- the S&P 500 gained 53%. By Feb. 4, 1976, 16 months into the bull, the S&P had gained 64%.

But the following years of that bull look very different from the 2002-07 bull. In 1976, the S&P 500 gained 19%. It fell 12% in 1977 and eked out a 3% gain in 1978, then got a second wind to record gains of 12% in 1979, 26% in 1980, 10% in 1981, 15% in 1982, 17% in 1983, 1% in 1984, 26% in 1985 and 16% in 1986. That's a period in which the gains (without dividends) of the S&P 500 beat the long-term stock market return (with dividends) in seven out of 11 years.

• MSN Money columnists ahead of the curve

The bullish period came to an end only with the stock market crash in October 1987. From 1974's low to 1987's high, the S&P 500 gained 447%. The gains in the initial 16-month period -- as impressive as they were at 64% -- were far less important to investors' wealth than the initial gains in the first 16 months of the 2002-07 bull market because of the extraordinary longevity of the 1974-87 bull.

Not all bears are alike

Why go through all this ancient stock market history? Because I think these two examples make it very clear that there are different kinds of bull markets. And that the character of those markets should have a huge effect on what strategy we use to recover from a bear market.

To simplify greatly, the 1972-74 bear market was succeeded by a long bull market that was part of an even longer bull market trend -- what stock market technicians call a secular bull market. This secular bull paused for the 1987 market crash, but only paused, before resuming a run that ran straight through the 2000 high.

The 1987 crash, which took the S&P 500 down 33% from its Aug. 25, 1987, high, didn't result in a grinding bear market. By Dec. 2, 1987, the stock market had started to move steadily higher again, and by July 1989 the index had recovered all its losses and again traded at August 1987 levels.

In contrast, there's a good chance the 2000-02 and 2007-09 (I hope) bears aren't merely severe interruptions in a secular bull market. They may indeed have ushered investors into a secular bear, a period where the long-term trend is as decidedly downward as it was upward from 1974 to 2000. In a secular bear market we can expect major and quite possibly explosive rallies -- much as the 1987 crash punctuated but didn't end the 1974-2000 secular bull market -- but those rallies likely won't be strong enough or last long enough to turn around the downward trend.

Continued: The case for a secular bear

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