The stock market does not always mirror the state of the economy. The 
downturn in 1987 occurred during a period of economic advance, although
the sharp rise in interest rates certainly contributed to the crash in 
stock prices. Conversely, the current leg of the prolonged bull market 
in stocks started in the early 1990s in the midst of a recession. 

Sometimes it is  possible to discern some underlying causes of past bear 
markets. Iraq's invasion of Kuwait in 1990 started the most recent bear 
market. The Persian Gulf crisis led to an escalation of oil prices, renewed 
fears of inflation, and a rise in interest rates, all of which sent stock 
prices down. 

The same confluence of economic and political factors accompanied the 
1973-1974 stock market collapse. The country remained mired in economic 
"stagflation," which stemmed primarily from the energy price increases 
resulting from the Arab oil embargo. The downturn was exacerbated by 
political upheavals associated with the Watergate saga and the country's 
involvement in Vietnam. 

Wise investors get ready for the next bear market by holding a balanced 
portfolio that reflects their investment goal, investment time horizon, 
risk tolerance, and financial condition. We recommend that you take the 
time now to review these four factors to ensure that your current asset 
allocation or mix of stocks, bonds, and cash investments suits your 
personal needs. 

When the markets turn south, make gradual shifts, but only when necessary. 
Resist the temptation to fundamentally alter your investment strategy 
simply because one component of your program heads south. Most experts 
will tell you that moving your money from stocks and bonds to more 
conservative investments in hopes of avoiding a loss or finding a gain 
is seldom successful. While investment vehicles such as bank deposit
accounts and certificates of deposit (CDs) safeguard you against day-to-day 
fluctuations, they do little to preserve the spending power of your assets 
over time.* If you are anxious about the proportion of your program invested 
in stocks, consider gradually and modestly reducing your stock holdings 
in small increments. 

Consider the tax consequences of selling. Many investors swore off
stocks after the 1973-1974 debacle - selling out their entire equity
holdings. Not only did these investors miss out on the market's eventual
rally, but they most likely incurred a tax liability in doing so. While it
should not be your sole consideration, evaluate the tax consequences of
your investment decisions.