If you’re invested in the market you may be telling yourself that the market always goes up and down so there is nothing to worry about right now, despite the terrible performance of nearly any investment vehicle.  The Dow Jones Industrial Average was down 9.4% in June, the worst June for the market since the great depression.  June’s losses, annualized, would cause the DOW to lose in excess of 72 percent of its value!

The retail investment industry has a tired mantra to the effect that history has been kind to the patient investor.  Their sales people are still being taught this mantra despite the slow collapse of the tech bubble that wiped out 50% of many 401ks and IRAs, and the predictable decline of the market since October of last year.  The same sales people that were saying, “Buy! Buy! Buy!” in 2000 and again last year, are still selling the only thing they know.  What is an investor to do?  The brokerage industry dogma teaches that if you have a high risk tolerance you should be invested in the market no matter what.  This may sound cynical, but the logic implies an inverse relationship between a persons risk tolerance and their IQ.

If you don’t want to be burned by the retail brokerage firm philosophy of riding out the rough times, try a different strategy.  A rational person looks at this market and says, “If I stay in the market I might be able to make 4 percent on my money this year, but with a struggling economy I could lose 20%.”  In the long run settling for the modest returns of preferred stocks, money markets, and CDs during these unusual times may very well be the wisest long-term strategy.  An investor could look at the strategy as buying down his risk.  It may cost a few percentage points of return to protect your account from 20% losses; not a bad trade-off.

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