Playing defense in a down market

Watching the action on Wall Street and reading about what it has done to so many investors have been nothing short of chilling.

Investors wonder: How long will this dive continue? And even when the stock market bottoms out, how long will it take before my investments rebound to the levels they were at early in 2000?

Buy-and-hold strategists will tell you to not worry about such questions because over time, stock values grow faster than those of bonds or money-market accounts.

But people grow concerned when they learn that it took 25 years for the Dow Jones Industrial Average to fully recover from the crash of 1929. Or that after the Dow first hit 1000 in 1968, investors had to wait another 16 years before it closed at that level again.

One professional trader I met with this week likened investing for the long term in today's market to "buying and wearing a bathing suit in the winter and waiting for summer to arrive." Brrrrr.

Perhaps a buy-and-freeze ... er, buy-and-hold strategy isn't 'suit'-able to today's market climate.

What to do when the market turns frigid?

Warm up to other options, including certain funds that deal with options. These instruments, commonly used by managers of so-called "bear" funds can act as a hedge against sudden drops in the market.

Bear funds are just one of a handful of defensive strategies that market watchers have been recommending lately to our personal finance writer, Guy Halverson.

So if you are among those languishing in index funds or other passive stock funds, Guy's cover story may spur you to think about a wider universe of choices – and whether any are right for you.