How to invest in a down market

/ Source: Motley Fool

There's no doubt about it: Investing is an emotional pursuit. Everything's cool when you're posting double-digit gains and the market is heading up. Then, just as quickly, everything's so not cool when the market changes course and drags your portfolio into the red with it.

With the traditional indicators showing that, yup, we're officially in a bear market — the oft-cited Dow Jones industrial average, which crossed 14,000 last year, recently fell below 11,000 — the panic and fear are palpable.

But here’s the good news: If you follow a few simple rules for investing during volatile times, you can reduce some of those emotional tailspins — and never worry about bear markets again.

1. Don't try to time the market
You've heard it before, and you'll undoubtedly hear it again, but this is one of the most important aspects of investing — and one of the most easily forgotten. No one, not even the rafts of experts, knows what the market is going to do when. Don't waste your time trying to figure it out.

That doesn't mean you should give up finding great investments that are undervalued, or which have terrific long-term growth prospects — that's a vital part of the game. But remember that even great stocks can get dragged down by the market from time to time, making short-term bumps in the road inevitable. Keep investing your money steadily, just as you would if we were in a bull market. Over the long run, the stock market has trended upward, so try not to fret over every market correction along the way.

While you can't time the market, you can take advantage of a declining market by snapping up great stocks at discounted prices. Who doesn't love a clearance sale? This year's roller-coaster market has pushed many big-name stocks significantly off their 52-week highs.

Microsoft and Cisco Systems, for instance, are off their 52-week highs by around 25 percent. Yahoo! is off its high by more than 30 percent, while AIG, Motorola and Sprint are off by more than 50 percent.

( is a joint venture of Microsoft and NBC Universal.)

If you want to get in on some great companies with a lowered price tag, now is the time to snap up stocks like these.

2. Keep costs under control
Trading costs and management fees start to loom larger when your investments are losing money. Engaging in frequent trading when market volatility and share-prices losses are on the rise is a surefire way to burn a hole in your portfolio.

The same principle applies to mutual funds. During good times, many people are lured into pricey funds that have posted outsized gains. But as soon as the going gets rough, investors are stuck with paying a ridiculous expense ratio on a fund that's not making them any money.

Many good funds also have low fees, and finding them should be a Foolish investor's priority. If you really want to be a tightwad, exchange-traded funds, with their rock-bottom expenses, are the way to go. Just stick to broad-market diversified funds like the Vanguard Large Cap ETF or the SPDRs.

3. Know your limitations
A lot of investors felt like geniuses in the late 1990s, when tech stocks were going through the roof. All you had to do was throw money at the latest batch of highfliers, then you could sit back and watch your portfolio double. Of course, when the bubble burst, a lot of people were taken by surprise.

Investing guru Warren Buffett stays within his circle of competency, and so should you. If energy continues to rise, but you understand little about the oil trade, you'd be wise to know your limitations and try not to pick a rocket stock.

Of course, you shouldn't be afraid to look for help. That could mean investing your money with a mutual fund manager who does understand a particular sector or country — as long as you find tenured and successful managers and keep a lid on fees, of course. Or it could mean subscribing to industry trade publications or message boards, or even joining a service like my Motley Fool Champion Funds, which offers up a new fund recommendation every month.

It's tougher to invest in a stormy market than a sunny one, but there's no reason you can't come out smiling in the end.