Bear lairs in a troubled market

"Get me out of here!" It's a cry echoing across the land, as investors pull their money out of the US stock market and look for someplace – any place – to put their money now.

The choice for many has been bank savings accounts. But for those still in the market, the name of the game now is "risk management," says Ralph Acampora, chief technical analyst for investment house Prudential Securities Inc.

If you sell now, experts warn, you violate the cardinal rule of investing: Buy low and sell high.

"It's actually late to be selling now," says Brian Piskorowski, a market commentator also with Prudential. "Better to just grit your teeth and wait this market out." But along the way, you might do a little "cherry picking," he says. That is, make selective investments to keep you afloat, while waiting for a stock-market rebound.

We've looked for some fairly conservative "lairs" that beleaguered investors might enter during this bear market.

Like everything else about today's bear market, the seven steps below designed to protect your portfolio may or may not work:

Balanced mutual funds: Oh sure, they are "stodgy," but over time they can also act as a counterbalance to a declining market, or plod out slow but steady gains in an expanding market. They seldom, if ever, set markets ablaze.

"They're OK – better than giving up on the market entirely," says Russ Kinnel, who heads up equity analysis for Morningstar Inc., in Chicago.

The information firm reports funds in this category are down about 10.5 percent for the year through July 24, compared with a loss of 24 percent for the Standard & Poor's 500 index.

Balanced funds hold a mix of both stocks and bonds. So if stocks sag, like now, the bonds are often up. And ditto if bonds sag and stocks rise.

Mr. Kinnel recommends that investors create their own balanced portfolios by buying a solid stock fund and a solid bond fund. But for those who want to keep it simple, he likes the Dodge & Cox Balanced Fund (800-621-3979), for its strong leadership on both the bond and equity sides. Another pick: the Vanguard Wellington Fund (800-662-7447), which carries low expenses. Both funds would work well inside a tax-sheltered account, such as an IRA or 401(k) plan, he says, otherwise you'll face taxes on dividends and interest income.

For a nonsheltered account, he likes Vanguard Tax Managed Balanced Fund. Reason: The bond component includes municipal bonds, which can escape federal income taxes. The fund management also tries to hold down the tax bill on the stock side.

International stock funds: True, stock markets are down all over the world. But some are down less than others – or are poised for gains. For best returns, think Asia, says Andrew Clark, an analyst with information-firm Lipper Inc., in Denver.

Europe looks troubled at this juncture, he says. Ditto Latin America, given economic uncertainties in Brazil. But Russia and Mexico look inviting for gutsy investors, Mr. Clark says.

When buying, seek mutual funds that invest entirely outside the United States. International funds are unlike "global" funds, which also carry stocks of US firms.

Finally, Clark says, look for funds that "buy domestic-oriented firms, not just large companies that sell heavily to the US."

Larger export-oriented firms will face difficulties in the months ahead as the slumping US dollar ratchets up their costs and lowers their potential returns.

An example of an international fund that has beaten the US stock market: Fidelity Japan Small Company Stock Fund (800-343-3548). It's down about 6 percent this year.

REIT funds: These funds essentially invest in commercial real estate. "Everyone should have at least a 5 to 10 percent position in their portfolio for REIT funds, just for proper diversification," says Alan Papier, an analyst with Morningstar.

REIT funds have been down the past few weeks, along with everything else. But the funds are still outperforming the broader market. The average small-cap value fund, this year's top-performing US stock category according to Morningstar, is down about 16 percent for the year. But the average REIT fund is down only 4 percent.

There are some 70 REIT funds that carry various types of real estate. Mr. Papier likes Security Capital US Real Estate Fund (888-732-8748), Morgan Stanley US Real Estate Fund (800-869-6397), and Columbia Real Estate Equity Fund (800-547-1707).

Since REITs are big on dividends, you will get a hefty annual tax bill unless the funds are in tax-sheltered accounts, such as a 401(k).

A good REIT fund for a taxable account, Papier says, is Third Avenue Real Estate Value (800-443-1021), which buys real-estate-operating companies. They tend not to crank out dividends like actual REITs – which by law must pay out 90 percent of earnings as dividends.

Bear funds: These are "contrarian" funds that use hedging strategies to profit from a falling stock market. Most of the top-performing funds are currently bear funds. But some market watchers wonder whether bear funds have run their course.

"It's late getting into a bear fund now," says Sheldon Jacobs, editor of the No-Load Fund Investor, a market newsletter. "These funds bet the market will continue on down. But we don't know if that will happen. At some point it will turn back up and these funds will lose money."

"Yes, we would lose money if the market goes back up," says a spokesman for the Prudent Bear Fund. (888-778-2327). "But we believe that we are in a bear market that will go on for some time now."

If you don't want a fund that seeks to earn money from a falling stock market, how about from a falling dollar? Check out the Prudent Safe Harbor Fund, which makes money from a slumping greenback. Maybe not patriotic, but profitable.

Government bonds and government bond funds: OK, you won't make much money with them, given low yields. Still, government bonds are uber safe and come in various packages, from $25 for US Series EE savings bonds, $50 for I bonds, and $1,000 for US Treasury bonds.

You can also buy municipal bonds, issued by cities and states, which kick in slightly higher interest earnings and are often free of federal income taxes, thus boosting your returns if you are in a high tax bracket.

Cash: Investors are now plowing money back into bank savings accounts, despite their lackluster yields.

An estimated $200 billion has reportedly gone into money markets and savings accounts since Jan. 1.

Experts agree, for liquidity, mutual-fund money-market accounts make better investments than bank CDs. When buying either, look for highest possible yields through a reference service, such as www.bankrate.com.

Pay down debt: "This is a perfect time to pay down your credit-card debt, if you have extra cash that you don't want to invest now," says Ric Edelman, who heads up Edelman Financial Center, in Fairfax, Va.

"You should always get credit-card debt out of the way before investing in the stock market anyway," he says. "It doesn't make much sense to earn 7 percent to 10 percent on your investments, if you are paying out 12 percent or more on credit cards."

But Mr. Edelman would not pay off the home mortgage. Mortgage rates are currently very low. "Keep that low mortgage," Edelman says. "The house will continue to earn value, even if you don't pay off the mortgage loan now."