**Market Strategies for the Very Brave

Market Strategies for the Very Brave
By GREGORY ZUCKERMAN

The stock market's tumble this year has left investors grappling for answers. Prices are down so far that many don't feel they should sell. But those who recently turned bullish -- including Warren Buffett, the most noted investor in recent memory -- were proved wrong, as the market kept plunging and the economy's outlook turned much bleaker.

The market is still way, way down for the year, despite the strong Thanksgiving-week rally. The Dow Jones Industrial Average rose 9.7% last week, but it's down 33% for the year. The Nasdaq was up 11% last week as well, but is off 42% for the year.

Downturns don't last forever, however, and profits usually result for those with enough dry ammunition to be able to participate in the next upturn.

That's why we've polled well-regarded strategists to develop a list of bear-market strategies to guide investors through this difficult period.

1 Dump the Dogs. If you've got stocks with weakening fundamentals, especially in industries dependent on the weakening consumer, wait for an upward bounce and sell before year's end. Vicious bear markets are noted for their sudden spikes, so there will be opportunity to take advantage of a move higher by culling your portfolio.

This kind of selling enables an investor to take advantage of a tax loss for this year. And if you're afraid of taking money out of the market at these beaten-down levels, it can be placed in shares of companies that are safer, and better candidates for a recovery.

One example: Coca-Cola, which has seen its operations hold up well, sports a dividend yield of about 3.5% and has a reasonable price/earnings multiple of less than 13, based on the next 12 months' earnings.

2 Be Price Conscious. Just as consumers are learning to look for bargains in their everyday spending, investors also need to pay more attention to costs. Many mutual funds charge annual expense ratios that add up to more than 1%. That's usually an exorbitant cost to pay in a bear market when exchange-traded funds and index-mutual funds can cost 0.70% or even less.

3 Be Wary of Technology. Investors are aware that consumer-focused companies are weakening. But Tobias Levkovich, Citigroup's chief U.S. equity strategist, says "we suspect that capital spending will drop 15%" over the next year. As a result, "even technology and resource companies get hit" from that drop, as will equipment manufacturers. "It's not just the consumer where fundamentals are weakening," he says.

4 Consider 'Sticky' Firms. Mr. Levkovich says to look for industries that have "sticky" customers and that still have some pricing power, such as managed-care and property-and-casualty insurers. Generic-drug giant Teva Pharmaceutical Industries, for example, could benefit if the Obama administration looks to curb drug costs, and the stock trades for about 13 times next year's expected earnings, a reasonable multiple.

5 Look for Attractive Bonds. The debt markets have had an even rougher time than the stock markets this year, crippling all kinds of bonds. That's for good reason -- the crisis is really about the nation's recent debt binge, and the massive deleveraging that is putting pressure on almost any kind of company with sizable debts.

But bonds of a number of high-quality companies have been unfairly punished as investors have dumped bond holdings, making these investments much more attractive. Analysts say investors should stick with highly rated bonds with juicy yields, but make sure to focus on stable companies in businesses that aren't dependent on consumer spending.

The top pick of Morgan Stanley's analysts: long-term debt of Verizon, which has a strong balance sheet and is among the strong wireless-phone operations through Verizon Wireless, its joint venture with Vodafone Group. The bonds yield almost 10% over the next 25 years -- much higher yields than in recent years and enough to compensate investors for their risk, Morgan Stanley argues.

6 Don't Jump In Feet First. The market is acting irrationally, right? When the dividend yield on the Standard & Poor's 500-stock index is about the same as the yield on 10-year Treasury notes, around 3.5% -- the first time that has happened in about 50 years -- it must mean stocks are a buy, right?

Not so fast. Many companies may have to trim dividends to conserve cash, making the juicy dividend yields of many shares unsustainable. So only focus on the dividends of companies that will be able to weather the downturn. At the same time, super-slim yields of 1% or less on some Treasury securities could signal a long-term economic downturn. The upshot: It's not a time to jump into the market with two feet, because the economy could be entering an extended period of weakness.

7 Tiptoe in. Despite a cloudy outlook, if you won't need to pull money out of the market for the next five or so years, there has never been a better time to stick to a "dollar-cost averaging" program, slowly putting a set amount into the market at regular intervals. The next five years could feature a stagnant U.S. stock market, or perhaps even worse performance. But over the long haul, stocks remain the better bet compared with 2% yields on five-year Treasurys. James Paulsen, chief investment officer at Wells Capital Management, recommends an emerging-markets ETF, such as iShares MSCI Emerging Markets Index Fund, for those with a long-term perspective.

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