Run and hide or stay and fight?

That's a really good question right now, especially since the Dow finished today down 39.4% from last year's peak. That's worse than the 37.8% drop that the Dow saw from peak to trough during the post-Internet Bubble blow-up. It now only trails two periods of stock market malaise -- the Great Depression and the extended down market during the late 60's and 70's.

During the Great Depression stocks declined 89% from summer 1929 to summer 1932, then spiked back up from 1932 to 1937 only to plunge another 52% from 1937 to 1942. In all it took 25 years for the Dow to recover its 1929 high.

After peaking in early 1966, the Dow had plunged 42% by Fall of 1974. And though '74 was the bottom, the market bounced up and down until 1982 when it finally started showing some real life again.

So are we in for a long period of terrible stock performance? I don't think so. Now I fully realize that I have been wrong on a lot over the past year, and certainly wasn't on the leading edge of this recent melt-down (and my portfolio shows this). I've now jumped on the "cyclical bear market" bandwagon, but, as others more prescient than myself have pointed out, this bear market really started back at the turn of the millennium. Right now we're down about 27% from the peak of 2000. And if you'd invested in the Dow in early 1998, you would have been roughly flat over the past 11 years. In other words, if this is a cyclical bear market, then we're well into it.

But that doesn't really help with the pressing question does it? So what do we do with our money? Well, I don't have the answer for any particular individual (when you need the money is a big question), but I'll tell you what I'm doing: I'm staying put. The problem with starting to freak out right now, or with trying to guess where the bottom is, is that there's a good likelihood that you'll miss out on some of the recovery -- which can happen fast.

How fast? After the bottom in 1932, the Dow rallied over 70% in two months. After bottoming out again in 1938, the market bounced back up over 20% in the next five months. May of 1970 was one of the many bottoms during that period and the market was up almost 35% over the next year. December of 1974 was the bottom of that period and over the next six months the Dow was back up 43%. And I could go on.

The point is that as violent and fast as this decline has been, the recovery can be equally so and trying to guess when to get out and when to get back in is more likely to get you in trouble than really get you market beating results. When markets start trading more on emotion than fundamentals, keeping a cool head is your best weapon.

If you've been investing all along in stable companies with good balance sheets that produce a good or service that's in real demand, then staying put is probably your best bet.

-AvgJoe