Bear markets make us nervous about approaching retirement—especially baby boomers. This can change our viewpoint on investing, which could reduce the clarity in our financial decision making.

Market “fear” psychology understood

Stock markets move, in reality, according to the mass psychology of the people. When the majority of the people optimistically believe in a healthy economy, they invest and stay invested. It is the collective feelings of people en masse that move market trends up or down. Yet still others are investing precisely when many mutual fund unit prices are lower.

Avoid the hype of the market media as this will instill fear and cause many to panic when cooler heads prevail. Try not to overreact and sell out of fear or anger, especially if your investments are down in value.

Use principled guidelines when investing

1. Assess asset allocation

Make sure your portfolio’s asset allocation isn't too conservative. One concern is that a pre-retiree can over-react in a market that is already down 40%. To sell an investment fund’s units, you effectively sell off the stocks held within the related fund, and you are doing the opposite of what the wisest investors have told us for years: buy low and sell higher. Many people, instead, sell lower or lowest, during bear markets.

By doing so, you guarantee one thing. You could now run out of money during your lifetime since you might decimate your portfolio by hawking it to the lowest bidders. And chances are this would occur due to the panic exacerbated by the media. People will buy if they can see profits gained in a healthy economy, backed by proper legislation that protects the investor against irresponsible decision makers at the helm of the people’s money. Be careful not to sell your stocks or equity funds to the lowest bidder; instead, consider buying lower when others give up the potential of future gains.

Talk carefully with your advisor as to your asset allocation. It is difficult to market time successfully. Let the pros do it! Some fund companies will move your money automatically among asset classes for you, using a specialized asset allocation service. This saves you the risk of trying to outguess the market on your own.

In a bear market, one that has lost value, holding equity fund units (which can hold the stocks of strong companies) can keep you poised for the next bull run and any potential growth in the future (though certain issues continue to face world finance).

2. Enjoy a new lifestyle

It may be time to trim your budget to free up money for investment opportunities. Limit unnecessary expenses. Living within one’s means is very important these days. Consider downsizing your home. Many in retirement homes live happily in small rooms. To achieve a lifestyle change, discipline and adherence to fine principles of planning are needed, but you might be surprised how you can free up several hundred dollars a month to add to investments to bolster your nest egg.

3. Invest using dollar-cost averaging

By investing in mutual funds over periodic intervals, such as monthly or quarterly, you can reduce risk. This is accomplished by taking the personal gamble out of trying to buy low and sell high. You average your investments, buying during the entire market cycle. You buy when the stock market is rising—the bullish period —and also when it is declining—the bearish phase. Dollar-cost averaging simply balances mutual fund purchases. It solves the problem of overinvesting during high markets, while in low markets you automatically gain because you are buying units at bargain prices.

4. Protect yourself with long-term-care insurance

Your main risk to your retirement portfolio is a potential cost of an extended stay in a long-term-care facility. Nursing homes are very expensive and can cost $50,000 or more per year. Such expenses can be a huge drain on your retirement savings. Consider buying long-term-care insurance, which can guarantee you the ability to meet long-term expenses and assure you the best possible lifestyle.

As an investor, you may know the meaning of risk and invest accordingly. You can view risk intelligently to mitigate risk.

5. Diversify your portfolio

You can invest in various mutual fund investments, which combine the right mix of asset types— cash, bonds, and stocks. With diversified investing, one part of your investment portfolio will always perform better than the other.

A low-risk investment today may yield only 2% per year. Such caution could prove to be your biggest risk if, for example, retirement income payments seriously erode your savings. There are alternative investments. Consider your age, your need for financial security, and your long-term and short-term goals. These factors combined will determine how you should balance your investments.

6. Buy-and-hold strategy

Many long-term investors have been extremely successful purchasing equity mutual funds with an excellent performance record because they have stayed invested even when the markets were declining.

Granted, it doesn't make sense to invest money you're saving for a trip in a buy-and-hold strategy. The secret is to invest capital you can keep invested for at least five to ten years in buy-and-hold strategies.

You may be tempted to sell or transfer investments in a panic, if the market indicates a downturn. Remember, knee-jerk reactions only increase risk. Indiscriminate fund selling or switching during a market decline could reduce your chance of recovery or trigger capital gains taxation. Adhere to your plan. Rather than sell, consider buying mutual funds at lower unit prices if the market goes down a little. If you sell when an investment is down 15%, it takes 18% to earn back the money in another investment. This is why it is often best to wait for the tide to turn.