4 ways to recession-proof a 401(k)

Going on offense: Bear-market funds

Prudent Bear (BEARX) is ahead 17.3% in the past three months and a respectable 11% annually for the past three years. Manager David Tice thinks the great bull market of the 1980s and '90s is over, replaced by a bear market that will last just as long. This fund uses derivatives to short the S&P 500 Index, owns gold-mining stocks and otherwise positions itself to prosper in hard times.

Grizzly Fund(GRZZX) is ahead 20.3% in the past three months, though its three-year return is -1.4% annually. It shorts individual stocks, borrowing and selling them with the expectation of buying them back more cheaply later. It uses the proceeds to short even more stocks -- risky but lucrative in a market where all of its top holdings are down, paced by tumbles of 25% at Ikon Office Solutions (IKN, news, msgs) and 32.9% at SiRF Technology Holdings (SIRF, news, msgs).

Even more offense: Leveraged inverse funds

If you have access to them, both ProFunds and Rydex offer funds designed to go up two times as much as the benchmark they follow goes down. ProFunds UltraBear (URPIX) is up 24% in the past three months, more than twice as much as the decline in the S&P 500 in the same period.

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Rydex Inverse OTC2X Strategy(RYVNX), which pits itself against the Nasdaq-100 ($NDX.X), is ahead 28.5% in three months, likewise a bit more than twice the loss of its target. Because of the way these funds are designed, they are very faithful to their objective on a daily basis, but they tend to wander over longer periods because of the compounding of returns. A fall of 10% followed by a 10% gain, for example, doesn't return you to parity -- it takes you to 99% of parity.

If you can't access these mutual funds, you can buy exchange-traded equivalents in any brokerage account. UltraShort S&P 500 Index ProShares (SDS, news, msgs) is up 24.5% in the past three months. Since it was introduced at the end of October, UltraShort MSCI EAFE Index ProShares (EFU, news, msgs), which shorts a global index, has spurted 22.7%. (The people who told you foreign stocks were a refuge from a U.S. downturn were wrong.)

A time for action

Many traditional investors will regard these strategies as offensive in the nose-holding sense, relying instead on diversification to minimize their losses and remaining fully invested for the inevitable eventual recovery.

I used to be like that -- until I lost more than a third of my nest egg in the bear market of 2000-02. These days, I am more proactive. I think there's a very good chance the U.S. stock market will finish 2008 with decent gains and maybe even something in the double digits. But it is already going down in double digits.

Promised relief from Congress and the Fed can't come fast enough to avert more carnage over the next month -- or three.

So I have taken nearly all of last year's equity profits and put them into bonds and other hedges. That leaves me with heavy equity exposure but not more than I can tolerate. I am a long-term investor. I'm just not a do-nothing investor.

Meet Tim Middleton at The Money Show

MSN Money's mutual funds columnist will be among more than 120 investment experts sharing their strategies for 2008 at The World Money Show in Orlando, Fla., Feb. 6-9. Meet Tim in person at the MSN Money booth Friday, Feb. 8 at 10:00 AM and Saturday, Feb. 9 at 10:30 AM. Spend four days planning and refining your portfolio as you choose from more than 320 workshops and panel presentations.

Admission is free for MSN Money users. To sign up, call 1-800-970-4355 and mention priority code No. 009553, or click here to register online.

At the time of publication, Tim Middleton owned the following securities mentioned in this article: UltraShort MSCI EAFE Index ProShares.

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